Short run: Increase in output

(Actual Economic Growth)

Long run: Increase in productivy

Definition
potential (Potential Economic
Growth)

Shown by PPC

Total demand for a country's

products at a given price level

C+I+G+(X-M)

Fall in the price of goods and

services in economy = extension in
AD
Aggregate Demand
Increase in population

Cut in rate of interest

Shift
Lower exchange rate

Greater confidence
Price level in the economy not
changing significantly over time Aggregate Demand and
Amount of goods and services that
Aggregate Supply
Economic growth domestic firms willing and able to
Greater economic certainty sell at a given price level

Country's products do not lose AS = perfectly elastic if resources

competitiveness Good because unemployed

Households and firms can plan with AS= more inelastic as firms
greater confidence approach full employment because
Aggregate Supply firms compete for resources which
will push up costs and price level
% rise in price level of goods and
Inflation rate
services over time Price stability
Full employment perfectly inelastic
- no further output possible
Improvements in products can be
hidden
Price index not completely Fall in cost of production
accurate
Some people by at reduced prices Shift
or second-hand Increase in quantity or quality of
not 0% Aim resources
Encourages producers to increase
output Better nutrition
Slight rise in prices good
More goods and services = higher
Firms can cut wage costs by not Better housing
Better than lay offs living standards
raising wages in line with inflation
Reasons Better healthcare

A country's record of revenue

receieved from selling exports and Definition Output up = employment up Extra tax revenue
expenditure on imports
Ch. 25: The Output up = trade up
If imports exceeds revenue from Macroeconomic Aims of
exports country will be in debt Gov't
Children
Long run aim: balanced
If exports higher than import
country residents will not enjoy as Balance of Payments Stability Retired
many products as possible
Those people willing and able to
Not everyone wants or is able to
Full employment work at the going wage can find Full time education
work (not part of the labor force)
Import of raw materials and capital employment
goods
Home makers
Sometimes deficit nto bad
These may increase the economy's
Sick and disabled
ability to produce more goods and
services to sell at home and abroad
Economically active All in the labor force

If unemployment low difficult to % of labor force who are willing

increase output to match higher E.g. Full employment vs. stable and able to work but are without
AD. Wages up, cost of production prices Low unemployment jobs
up, prices up

Unemployment rate Unemployment/Labor force x 100

High exports - High output -
Employment up - income up -
imports up Full employment and economic Wasted resources
growth vs. balance of payments
stability Conflicting macroeconomic aims
High output requires imported raw Unemployment Why is it bad? Low income
materials and capital goods
Gov't revenue spent
Scale of the problem
Will always be people changing
Reduce inflation or reduce jobs
Consequences Depends on Prioritization
unemployment
Objective not 0%
What citizens are concerned about Aims for low unemployment -
approx. 3%

Rich taxed more than the poor

Benefits e.g. housing and

unemployment
Taxing and spending
Without gov't providing these
services free or at subsidized prices
Education and health
the poor may not find them
accessible

Alleviate poverty
Redistribution of income
Rich marry rich - better education -
Reasons more opportunity to save

Potential for social unrest due to

feeling of social injustice

People have different needs

Aim Not perfectly equal Too much tax and too many
benefits - disincentive to effort and
enterprise
Ch. 25: The Macroeconomic Aims of Gov't
1. Economic growth
1.1. Definition

1.1.1. Short run: Increase in output (Actual Economic Growth)

1.1.2. Long run: Increase in productivy potential (Potential Economic Growth)

1.1.3. Shown by PPC

1.2. Aggregate Demand and Aggregate Supply

1.2.1. Aggregate Demand

1.2.1.1. Total demand for a country's products at a given price level

1.2.1.2. C+I+G+(X-M)

1.2.1.3. Fall in the price of goods and services in economy = extension in AD

1.2.1.4. Shift

1.2.1.4.1. Increase in population

1.2.1.4.2. Cut in rate of interest

1.2.1.4.3. Lower exchange rate

1.2.1.4.4. Greater confidence

1.2.2. Aggregate Supply

1.2.2.1. Amount of goods and services that domestic firms willing and able to sell at a given
price level

1.2.2.2. AS = perfectly elastic if resources unemployed

1.2.2.3. AS= more inelastic as firms approach full employment because firms compete for
resources which will push up costs and price level

1.2.2.4. Full employment perfectly inelastic - no further output possible

1.2.2.5. Shift

1.2.2.5.1. Fall in cost of production

1.2.2.5.2. Increase in quantity or quality of resources

1.3. Reasons

1.3.1. More goods and services = higher living standards

1.3.1.1. Better nutrition

1.3.1.2. Better housing

1.3.1.3. Better healthcare

 1.3.2. Output up = employment up

1.3.2.1. Extra tax revenue

1.3.3. Output up = trade up

2. Low unemployment
2.1. Full employment

2.1.1. Those people willing and able to work at the going wage can find employment

2.1.1.1. Not everyone wants or is able to work (not part of the labor force)

2.1.1.1.1. Children

2.1.1.1.2. Retired

2.1.1.1.3. Full time education

2.1.1.1.4. Home makers

2.1.1.1.5. Sick and disabled

2.2. Economically active

2.2.1. All in the labor force

2.3. Unemployment

2.3.1. % of labor force who are willing and able to work but are without jobs

2.3.2. Unemployment rate

2.3.2.1. Unemployment/Labor force x 100

2.3.3. Why is it bad?

2.3.3.1. Wasted resources

2.3.3.2. Low income

2.3.3.3. Gov't revenue spent

2.3.4. Objective not 0%

2.3.4.1. Will always be people changing jobs

2.3.4.2. Aims for low unemployment - approx. 3%

3. Redistribution of income
3.1. Taxing and spending

3.1.1. Rich taxed more than the poor

3.1.2. Benefits e.g. housing and unemployment

3.1.3. Education and health

 3.1.3.1. Without gov't providing these services free or at subsidized prices the poor may not find
them accessible

3.2. Reasons

3.2.1. Alleviate poverty

3.2.2. Rich marry rich - better education - more opportunity to save

3.2.3. Potential for social unrest due to feeling of social injustice

3.3. Aim

3.3.1. Not perfectly equal

3.3.1.1. People have different needs

3.3.1.2. Too much tax and too many benefits - disincentive to effort and enterprise

4. Price stability
4.1. Price level in the economy not changing significantly over time

4.2. Good because

4.2.1. Greater economic certainty

4.2.2. Country's products do not lose competitiveness

4.2.3. Households and firms can plan with greater confidence

4.3. Inflation rate

4.3.1. % rise in price level of goods and services over time

4.4. Aim

4.4.1. not 0%

4.4.1.1. Price index not completely accurate

4.4.1.1.1. Improvements in products can be hidden

4.4.1.1.2. Some people by at reduced prices or second-hand

4.4.1.2. Slight rise in prices good

4.4.1.2.1. Encourages producers to increase output

4.4.1.2.2. Firms can cut wage costs by not raising wages in line with inflation

4.4.1.2.2.1. Better than lay offs

5. Balance of Payments Stability

5.1. Definition

5.1.1. A country's record of revenue receieved from selling exports and expenditure on imports

5.2. Long run aim: balanced

5.2.1. If imports exceeds revenue from exports country will be in debt

 5.2.2. If exports higher than import country residents will not enjoy as many products as possible

5.3. Sometimes deficit nto bad

5.3.1. Import of raw materials and capital goods

5.3.2. These may increase the economy's ability to produce more goods and services to sell at
home and abroad

6. Conflicting macroeconomic aims

6.1. E.g. Full employment vs. stable prices

6.1.1. If unemployment low difficult to increase output to match higher AD. Wages up, cost of
production up, prices up
6.2. Full employment and economic growth vs. balance of payments stability

6.2.1. High exports - High output - Employment up - income up - imports up

6.2.2. High output requires imported raw materials and capital goods

6.3. Prioritization

6.3.1. Reduce inflation or reduce unemployment

6.3.1.1. Depends on

6.3.1.1.1. Scale of the problem

6.3.1.1.2. Consequences

6.3.1.1.3. What citizens are concerned about