F1 Macro economic factors

1. Define macro-economic policy Definition It is the study of the aggregated effected of the decision of individual economic units (such as households or business). It looks at a complete national economy, or the international economic system as a whole.

2. The circular flow of income and expenditure Firms Households Consumption Savings Investments Financial sectors Expenditure Taxation Government Import demand Export Foreign sector

2. The circular flow of income and expenditure Example question Which of the following is not a withdrawal to the circular of income? A. Savings B. Export C. Taxation D. Import

3. Factors affect the economy The multiplier in the national economy Increase in national income=Initial investment*multiplier Multiplier is depended on factors such as the proportion of new investments spend and the proportion of saving.

3. Factors affect the economy Aggregate supply and aggregate demand Aggregate supply (AS) refers to the ability of the economy to produce goods and services while aggregate demand (AD) is the total demand in the economy for goods and services. The prices, national income and consumer confidence will influence AS and AD.

4. The determination of national income Equilibrium national income It will be reached where AD equals AS. Full-employment national income It will be reached if there is full employment where AD equals AS. It is the ideal equilibrium level of income

4. The determination of national income Inflationary gaps It happens where there is full employment, and AD>AS. Deflationary gap It happens where there is unemployment, prices are fairly constant and AS changes as AD varies.

4. The determination of national income Stagflation It is a combination of unacceptable high unemployment and high inflation. It is caused by a long-term major increase in costs.

4. The determination of national income Example question What is the situation where the increase in demand will cause increase in output rather than increase in price? A. Full employment national income B. Inflationary gap C. Deflationary gap D. Stagflation

Boom Output Trend in output Recession Recovery Depression Time 5. The business cycle Boom Output Trend in output Recession Recovery Depression Time

6. Inflation and its consequences Definition Inflation is an increase in price levels generally. It means the decline in the purchasing power of money. The impact of inflation a. Redistribution of income and wealth b. Balance of payments effects c. Uncertainty of the value money and prices d. Economic growth and investment

6. Inflation and its consequences How to measure inflation? a. Retail Prices Index (RPI) b. The underlying rate of inflation RPIX (RPI- mortgage interests) PRIY (PRIX-sales tax) c. Consumer Prices Index (CPI) CPI=RPI-housing costs

6. Inflation and its consequences Cause of inflation a. Demand pull factors b. Cost push factors c. Import cost factors d. Expectation e. Excessive growth in money supply

6. Inflation and its consequences Example question Which of the following organization might benefit from a period of high price inflation? A. An organization which has a large number of long-term payables B. An exporter of goods to a country with relative low inflation C. A supplier of goods in a market where consumers are highly price sensitive D. A large retailer with a high level of inventory on display and low rate of inventory turnover

7. Unemployment Flow into unemployment Redundancies, voluntary quitting from a job, lay-offs, school leavers without a job, others rejoining the workforce but with no job yet Flow out of unemployment a. Unemployed finding the job b. Laid-off people being re-employed c. Unemployed people stopping search for work

7. Unemployment Consequences of unemployment a. Loss of output b. Loss of human capital c. Increasing inequalities in the income distribution d. Social costs e. Increased burden of welfare payments

7. Unemployment Cause of unemployment Category Comments Real wage Labor supply>labor demand, strong labor unions or minimum wages Frictional Short-term, difficulty in matching workers with jobs Seasonal Short-term, occur in certain industries Structural Long-term changes in industries Technological Long-term changes due to new techs Cyclical/demand deficient Long-term, caused by the business cycle

7. Unemployment Example question Which of the types of unemployment is short term? A. Structural unemployment B. Seasonal unemployment C. Technological unemployment D. Cyclical unemployment

7. Unemployment Government employment policies Job creation ≠ Reducing unemployment Ways to reduce unemployment: a. Spending more on jobs b. Encourage growth c. Encourage training d. Encourage labor mobility e. Abolishing minimum wage regulations

8. The objective of economic growth It can be measured by GNP/head Actual economic growth It is determined by AD and AS Potential economic growth It is determined by AS rather than AD

8. The objective of economic growth Technological progress Capital saving Neutral Labor saving Example: A product requires $10 of capital and labor each. After an innovation, only $10 of capital and $5 of labor are required. Then which type of technological progress has been achieved?

8. The objective of economic growth Appraisals of economic growth Advantage Disadvantage A higher income per head Faster usage of natural resources Higher levels of consumptions and living Increasing pollution Providing more welfare services Increasing structural unemployment In the short run, higher growth requires a cut in consumption

9. Government policies for managing economy Macroeconomic policy objectives a. To achieve economic growth b. To control price inflation c. To achieve full employment d. To achieve a balance between exports and imports

10. Fiscal policy Definition Fiscal policy is a kind of government policy which focus on taxation, public borrowing and public spending Budget surplus, budget deficit and PSBR Budget deficit Public Sector Borrowing Requirement (PSBR)

10. Fiscal policy A combination of expenditure and taxation Increase spending, reduce tax (Stimulate demand) Reduce spending, increase tax (Reduce demand)

10. Fiscal policy Example question When the economy is in the recovery stage of the business cycle, which type of policy is helpful? A. Budget surplus B. Increase taxation, reduce spending C. Reducing taxation, reduce sending D. Reducing taxation, increasing spending

10. Fiscal policy Functions of taxation a. To raise revenue for the government b. To cause certain products to be priced to take into account their social costs c. To redistribution income and wealth d. To protect industries from foreign competition

10. Fiscal policy Types of taxes A. Direct taxes (Income taxes, capital gain taxes, inheritance taxes) Indirect taxes (Other taxes) B. Regressive taxes Proportional taxes Progressive taxes

11. Monetary policy Definition The monetary policy is a kind of government policy uses money supply, interest rates, exchange rates or credit control to influence aggregate demand.

11. Monetary policy The money supply as a target of monetary policy The increase in the money supply will raise prices and income which means demand will be raised. However, money supply is a medium-term target.

11. Monetary policy Interest rate as a target of monetary policy The increase in interest rates will reduce investments and borrowing which means demand will be reduced. Interest rates influence the exchange rates and inflation etc. Interest rate also has a considerable time leg.

11. Monetary policy Exchange rates as a target of monetary policy The fall of exchange rates will stimulate exports and reduce demand for imports When a country is heavily dependent on overseas trade, it might be appropriate to establish a target exchange rate. However, the exchange rate is dependent on inflation and interest rates.

11. Monetary policy Example question Which type of monetary policy cannot benefit the national income growth? A. Lower interest rates B. Increase money supply C. Increase in exchange rate D. Increase credit

11. Monetary policy Targets and indicators Leading indicators Coincident indicators Lagging indicators

12. The balance of payment Current account and capital account Capital account (Public sector flows of capital into and out of the country such as the government loans) Current account (Others)

12. The balance of payment Example question Which of the following is not consisted in the current account of a country? A. Trade in goods and services B. Foreign government loans C. Interest received from D. Donations abroad by non-government sectors

12. The balance of payment The equilibrium in the balance of payment If the exchange rate remains stable and the annual trades of goods and services is in overall balance over a period of years. However, if these things requires government to introduce measures which will cause unemployment, inflation, reduced economic growth or trade barriers , then the equilibrium does not exist.

12. The balance of payment Surplus and deficit in the current account Surplus (Export>import, currency will appreciate) Deficit (Export<Import, currency will depreciate)

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