7. aggregate demand and supply and macroeconomic problems
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7. Aggregate Demand and Supplyand Macroeconomic Problems
Macroeconomic ObjectivesMacroeconomic Objectives
• Distinction between microeconomics and macroeconomics
• The major macroeconomic issues
– economic growth
– unemployment
– inflation
– balance of payments and exchange rates
• balance of payments deficits and surpluses
• exchange rate movements
• Distinction between microeconomics and macroeconomics
• The major macroeconomic issues
– economic growth
– unemployment
– inflation
– balance of payments and exchange rates
• balance of payments deficits and surpluses
• exchange rate movements
Economic growth (average % per annum), Unemployment (average %), Inflation (average % per annum)
The Circular Flow of IncomeThe Circular Flow of Income
• The inner flow• The inner flow
Factorpayments
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Consumption ofdomestically
produced goodsand services (Cd)
The circular flow of income
Firms
Households
The Circular Flow of IncomeThe Circular Flow of Income
• Withdrawals
– net saving
– net taxes
– import expenditure
• Injections
– investment
– government expenditure
– export expenditure
• Withdrawals
– net saving
– net taxes
– import expenditure
• Injections
– investment
– government expenditure
– export expenditure
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Investment (Investment (II))Investment (Investment (II))
GovernmentGovernmentexpenditure (expenditure (GG))
GovernmentGovernmentexpenditure (expenditure (GG))
ExportExportexpenditure (expenditure (XX))
ExportExportexpenditure (expenditure (XX))
BANKS, etcBANKS, etc
Netsaving (S)
Netsaving (S)
GOV.GOV.
NetNettaxes (taxes (TT))
NetNettaxes (taxes (TT))
ABROAD
ImportImportexpenditure (expenditure (MM))
ImportImportexpenditure (expenditure (MM))
The circular flow of incomeThe circular flow of income
WITHDRAWALS
INJECTIONS
The Circular Flow of IncomeThe Circular Flow of Income
• The relationship between injections and withdrawals– the links between them
• The relationship between injections and withdrawals– the links between them
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Investment (Investment (II))Investment (Investment (II))
GovernmentGovernmentexpenditure (expenditure (GG))
GovernmentGovernmentexpenditure (expenditure (GG))
ExportExportexpenditure (expenditure (XX))
ExportExportexpenditure (expenditure (XX))
BANKS, etcBANKS, etc
Netsaving (S)
Netsaving (S)
GOV.GOV.
NetNettaxes (taxes (TT))
NetNettaxes (taxes (TT))
ABROAD
ImportImportexpenditure (expenditure (MM))
ImportImportexpenditure (expenditure (MM))
The circular flow of incomeThe circular flow of income
WITHDRAWALS
INJECTIONS
The Circular Flow of IncomeThe Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them
– planned injections may not equal planned withdrawals
• The relationship between injections and withdrawals
– the links between them
– planned injections may not equal planned withdrawals
The Circular Flow of IncomeThe Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them
– planned injections may not equal planned withdrawals
• Equilibrium in the circular flow
• The relationship between injections and withdrawals
– the links between them
– planned injections may not equal planned withdrawals
• Equilibrium in the circular flow
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Investment (Investment (II))Investment (Investment (II))
GovernmentGovernmentexpenditure (expenditure (GG))
GovernmentGovernmentexpenditure (expenditure (GG))
ExportExportexpenditure (expenditure (XX))
ExportExportexpenditure (expenditure (XX))
BANKS, etcBANKS, etc
Netsaving (S)
Netsaving (S)
GOV.GOV.
NetNettaxes (taxes (TT))
NetNettaxes (taxes (TT))
ABROAD
ImportImportexpenditure (expenditure (MM))
ImportImportexpenditure (expenditure (MM))
The circular flow of incomeThe circular flow of income
WITHDRAWALS
INJECTIONS
The Circular Flow of IncomeThe Circular Flow of Income
• The relationship between injections and withdrawals
– the links between them
– planned injections may not equal planned withdrawals
• Equilibrium in the circular flow
• The circular flow and the four macroeconomic objectives
• The relationship between injections and withdrawals
– the links between them
– planned injections may not equal planned withdrawals
• Equilibrium in the circular flow
• The circular flow and the four macroeconomic objectives
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
Investment (Investment (II))Investment (Investment (II))
GovernmentGovernmentexpenditure (expenditure (GG))
GovernmentGovernmentexpenditure (expenditure (GG))
ExportExportexpenditure (expenditure (XX))
ExportExportexpenditure (expenditure (XX))
BANKS, etcBANKS, etc
Netsaving (S)
Netsaving (S)
GOV.GOV.
NetNettaxes (taxes (TT))
NetNettaxes (taxes (TT))
ABROAD
ImportImportexpenditure (expenditure (MM))
ImportImportexpenditure (expenditure (MM))
The circular flow of incomeThe circular flow of income
WITHDRAWALS
INJECTIONS
Measuring national incomeMeasuring national income
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
Agriculture, forestry and fishing £9 656 mMining, energy and water supply £29 485 m
Manufacturing£147 306 m
Construction £39 262 m
Wholesale and retail trade; repairs £89 392 m
Hotels and restaurants £23 678m
Transport and communication £63 340 m
Banking, finance, insurance, etc.£17 737 m
Letting of property £159 240 m
Public administration and defence £40 495 m
Education, health and social work £89 041 m
Other services £38 912 m
Gross value added (GVA) at basic prices£747 544 m
1.33.9
19.7
5.3
12.0
3.2
8.4
2.4
21.3
5.4
11.9
5.2
100.0
Percen
tage o
f GV
A
UK GVA product-based measure: 1998
Measuring national incomeMeasuring national income
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• The income approach
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• The income approach
62.0
29.9
5.8
2.3
100.0
Compensation of employees (wages and salaries)
£463 398 m
Operating surplus(gross profit, rent and interest of firms
government and other institutions)£223 212 m
Mixed incomes£43 379 m
Tax less subsidies on production(other than those on products) plusstatistical discrepancy £17 555 m
Gross value added (GVA) at basic prices £747 544m
UK GVA by category of income: 1998
Percen
tage o
f GV
A
Measuring national incomeMeasuring national income
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• The income approach– from GVA to GDP
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• The income approach– from GVA to GDP
Gross value added (GVA) at basic prices £747 544m
UK GDP: 1998
Gross value added (GVA) at basic prices £747 544m
plus Taxes on products £103 634m
UK GDP: 1998
Gross value added (GVA) at basic prices £747 544m
plus Taxes on products £103 634m
less Subsidies on products £7 453m
UK GDP: 1998
Gross value added (GVA) at basic prices £747 544m
plus Taxes on products £103 634m
less Subsidies on products £7 453m
GDP (at market prices) £843 725m
UK GDP: 1998
Measuring national incomeMeasuring national income
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• The income approach
• The expenditure approach
• GDP: the measure of national income
• Methods of measuring GDP– the product approach
– the income approach
– the expenditure approach
• The product approach– measuring GVA
• The income approach
• The expenditure approach
UK GDP at market prices by category of expenditure: 1998
UK GDP at market prices by category of expenditure: 1998
UK GDP at market prices by category of expenditure: 1998
UK GDP at market prices by category of expenditure: 1998
UK GDP at market prices by category of expenditure: 1998
UK GDP at market prices by category of expenditure: 1998
Measuring national incomeMeasuring national income
• GDP: the measure of national income
• The product approach
• The income approach
• The expenditure approach
• From GDP to net national income (NNY)
• GDP: the measure of national income
• The product approach
• The income approach
• The expenditure approach
• From GDP to net national income (NNY)
UK GDP, GNY and NNY at market prices: 1998
UK GDP, GNY and NNY at market prices: 1998
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
O
Nat
iona
l out
put
Time
Potential output
Actualoutput
The business cycle
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
O
Nat
iona
l out
put
Time
Potential output
Actualoutput
1
2
3
4
1
2
34
The business cycle
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
• Growth in actual and potential output
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
O
Nat
iona
l out
put
Time
Potential output
Actualoutput
Trendoutput
The business cycle
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
• the magnitude of the phases
• Economic growth and the business cycle
– fluctuations in actual growth
– the phases of the business cycle
– trend growth
– the business cycle in practice
• the irregularity of the cycle
• the length of the phases
• the magnitude of the phases
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Causes of actual growth
– aggregate demand
– aggregate demand relative to potential output
• Actual growth in practice
– experience since 1970
• Causes of actual growth
– aggregate demand
– aggregate demand relative to potential output
• Actual growth in practice
– experience since 1970
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
Growth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France
Germany
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France
Germany
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France USA
Germany
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France USA
Germany
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France USA
GermanyJapan
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000
Ann
ual g
row
th r
ate
(%)
UK
France USA
GermanyJapan
Growth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countriesGrowth rates in selected industrial countries
Economic Growth andthe Business Cycle
Economic Growth andthe Business Cycle
• Causes of potential growth– increases in the quantity of factors
• capital
• labour
• land and raw materials
• the problem of diminishing returns
– increases in factor productivity
• Policies to achieve growth– demand-side and supply-side policies
– market-orientated & interventionist policies
• Causes of potential growth– increases in the quantity of factors
• capital
• labour
• land and raw materials
• the problem of diminishing returns
– increases in factor productivity
• Policies to achieve growth– demand-side and supply-side policies
– market-orientated & interventionist policies
UnemploymentUnemployment
• The meaning of 'unemployment'
• Official measures of unemployment
– claimant unemployment
• do claimant statistics give a true picture of unemployment?
– standardised unemployment (ILO/OECD)
• The meaning of 'unemployment'
• Official measures of unemployment
– claimant unemployment
• do claimant statistics give a true picture of unemployment?
– standardised unemployment (ILO/OECD)
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
Unemployment rates in selected industrial countries
UK
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France
Germany
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France
Germany
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France USA
Germany
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France USA
Germany
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France USA
Germany Japan
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France USA
Germany Japan
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France USA
Germany Japan
OECD
Unemployment rates in selected industrial countries
0
2
4
6
8
10
12
14
1970 1975 1980 1985 1990 1995 2000
Une
mpl
oym
ent (
% o
f wor
kfor
ce)
UK
France USA
Germany Japan
OECD
Unemployment rates in selected industrial countries
UnemploymentUnemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
Qe
Aggregate demand and supply of labour
O
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ASL
ADL
We
UnemploymentUnemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
– disequilibrium unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
– disequilibrium unemployment
O
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ASL
ADL
We
W2
B A
Disequilibrium unemployment
Q2 Q1
UnemploymentUnemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
– disequilibrium unemployment
– equilibrium unemployment
• Unemployment and the labour market
– the aggregate demand and supply of labour
– equilibrium in the model
– disequilibrium unemployment
– equilibrium unemployment
Equilibrium unemployment
O
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ADL
We
ASL
e
Qe
Q2QeO
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ASL
ADL
We
N
e d
Equilibrium unemployment
Equilibrium and disequilibrium unemployment
O
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ADL
We
e
Qe
ASL
O
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ASL
ADL
We
W2
b a
e
Disequilibriumunemployment
Equilibrium and disequilibrium unemployment
O
Ave
rag
e (r
ea
l) w
ag
e ra
te
No. of workers
ASL
ADL
We
W2
b a
e
N
c
Equilibriumunemployment
Disequilibriumunemployment
Equilibrium and disequilibrium unemployment
UnemploymentUnemployment
• Disequilibrium unemployment
– real-wage (classical) unemployment
– demand-deficient (cyclical) unemployment
– unemployment arising from a growth in the labour supply
• Disequilibrium unemployment
– real-wage (classical) unemployment
– demand-deficient (cyclical) unemployment
– unemployment arising from a growth in the labour supply
UnemploymentUnemployment
• Equilibrium unemployment
– frictional (search) unemployment
– structural unemployment
• changing pattern of demand
• technological unemployment
• regional unemployment
– seasonal unemployment
• Equilibrium unemployment
– frictional (search) unemployment
– structural unemployment
• changing pattern of demand
• technological unemployment
• regional unemployment
– seasonal unemployment
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve• The aggregate demand curve
O
Pri
ce le
vel
National output
AD
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
O
Pri
ce le
vel
National output
AD
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
O
Pri
ce le
vel
National output
AD
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
O
Pri
ce le
vel
National output
AD
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
O
Pri
ce le
vel
National output
AS
AD
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
– Why aggregate supply curves generally slope upwards
• The aggregate demand curve
– Why aggregate demand curves slope downwards
• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
– Why aggregate supply curves generally slope upwards
O
Pri
ce le
vel
National output
AS
AD
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve
– Why aggregate demand curves slope downwards• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
– Why aggregate supply curves generally slope upwards
• Equilibrium
• The aggregate demand curve
– Why aggregate demand curves slope downwards• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve
– Why aggregate supply curves generally slope upwards
• Equilibrium
O
Pri
ce le
vel
National output
AS
AD
Pe
Aggregate demand and aggregate supply
O
Pri
ce le
vel
National output
AS
AD
Pe
P2
ab
Aggregate demand and aggregate supply
Aggregate Demand and SupplyAggregate Demand and Supply
• The aggregate demand curve– Why aggregate demand curves slope
downwards• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve– Why AS curves generally slope upwards
• Equilibrium– Effect of a shift in the AD curve
• The aggregate demand curve– Why aggregate demand curves slope
downwards• import effect
• interest-rate effect
• savings effect
• The aggregate supply curve– Why AS curves generally slope upwards
• Equilibrium– Effect of a shift in the AD curve
InflationInflation
• Defining inflation
• The costs of inflation
– redistribution
– uncertainty
– balance of payments
– resources used to cope with inflation
• Experience of inflation since 1965
• Defining inflation
• The costs of inflation
– redistribution
– uncertainty
– balance of payments
– resources used to cope with inflation
• Experience of inflation since 1965
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15
USA
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15
USA
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15 Japan
USA
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15 Japan
USA
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15 Japan
USAOECD
Inflation rates in selected industrial countries
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000
Infla
tion
(% in
crea
se in
ret
ail p
rices
)
UK
EU 15 Japan
USAOECD
Inflation rates in selected industrial countries
InflationInflation
• Types of inflation– demand pull
• Types of inflation– demand pull
Demand-pull inflation
O
Pri
ce le
vel
National output
AS
AD1
P1
Q1
O
Pri
ce le
vel
National output
AS
AD1
P1
Q1
AD2
Demand-pull inflation
O
Pri
ce le
vel
National output
AS
AD1
P1
Q1
AD2
P2
Q2
Demand-pull inflation
InflationInflation
• Types of inflation– demand pull
– cost push
• Types of inflation– demand pull
– cost push
InflationInflation
• Types of inflation– demand pull
– cost push• wage push
• Types of inflation– demand pull
– cost push• wage push
InflationInflation
• Types of inflation– demand pull
– cost push• wage push
• profit push
• Types of inflation– demand pull
– cost push• wage push
• profit push
InflationInflation
• Types of inflation– demand pull
– cost push• wage push
• profit push
• import-price push
• Types of inflation– demand pull
– cost push• wage push
• profit push
• import-price push
Cost-push inflation
O
Pri
ce le
vel
National output
AS1
AD
P1
Q1
O
Pri
ce le
vel
National output
AS1
AD
P1
Q1
AS2
Cost-push inflation
O
Pri
ce le
vel
National output
AS1
AD
P1
Q1
AS2
P2
Q2
Cost-push inflation
InflationInflation
• Types of inflation
– demand pull
– cost push
• wage push
• profit push
• import-price push
– the interaction of demand-pull and cost-push inflation
• Types of inflation
– demand pull
– cost push
• wage push
• profit push
• import-price push
– the interaction of demand-pull and cost-push inflation
The interaction of demand-pull and cost-push inflation
O
Pri
ce le
vel
National output
AS1
AD1
P1
O
Pri
ce le
vel
National output
AS1
AD1
P1
AS2
AD2
P2
The interaction of demand-pull and cost-push inflation
O
Pri
ce le
vel
National output
AS1
AD1
P1
AD2
P2
AS3
AD3
P3
AS2
The interaction of demand-pull and cost-push inflation
InflationInflation
• Types of inflation– demand pull
– cost push• wage push
• profit push
• import-price push
– the interaction of demand-pull and cost-push inflation
– structural (demand shift)
• Types of inflation– demand pull
– cost push• wage push
• profit push
• import-price push
– the interaction of demand-pull and cost-push inflation
– structural (demand shift)
InflationInflation
• Types of inflation– demand pull
– cost push• wage push
• profit push
• import-price push
– the interaction of demand-pull and cost-push inflation
– structural (demand shift)
– expectations and inflation
• Types of inflation– demand pull
– cost push• wage push
• profit push
• import-price push
– the interaction of demand-pull and cost-push inflation
– structural (demand shift)
– expectations and inflation
InflationInflation
• Policies to tackle inflation– demand-side policies
– supply-side policies
• Policies to tackle inflation– demand-side policies
– supply-side policies
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