unemployment.ppt
-
Upload
goutam-reddy -
Category
Documents
-
view
105 -
download
1
description
Transcript of unemployment.ppt
![Page 1: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/1.jpg)
Unemployment, Inflation and
Growth
Unemployment, Inflation and
Growth
![Page 2: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/2.jpg)
Money and PricesMoney and Prices
• The quantity theory of money
• The equation of exchange: MV = PY– M money supply
– V velocity of circulation
– P price level (number of times greater than in base year)
– Y real value of output at base-year prices
– MV = PQ
• The link between money and prices– quantity theory holds if V and Y are determined
independently of M
• The quantity theory of money
• The equation of exchange: MV = PY– M money supply
– V velocity of circulation
– P price level (number of times greater than in base year)
– Y real value of output at base-year prices
– MV = PQ
• The link between money and prices– quantity theory holds if V and Y are determined
independently of M
![Page 3: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/3.jpg)
Money and PricesMoney and Prices
• Assumptions about the velocity of circulation
– the short run
• uncertain relationship between money and prices
• the monetary transmission mechanism
– the money–interest rate link
– the interest rate–spending link
– the long run
• the theory of portfolio balance
• Assumptions about the velocity of circulation
– the short run
• uncertain relationship between money and prices
• the monetary transmission mechanism
– the money–interest rate link
– the interest rate–spending link
– the long run
• the theory of portfolio balance
![Page 4: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/4.jpg)
Money and PricesMoney and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
![Page 5: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/5.jpg)
O
Pric
e le
vel
National output
AS
Different aggregate supply curvesDifferent aggregate supply curves
![Page 6: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/6.jpg)
O
AS
Pric
e le
vel
National output
Y1
P1
AD1
Different aggregate supply curvesDifferent aggregate supply curves
![Page 7: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/7.jpg)
P2
O
AS
Y1
Pric
e le
vel
National output
Y2
P1
AD2
AD1
Different aggregate supply curvesDifferent aggregate supply curves
![Page 8: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/8.jpg)
Q1
Short-run response of a profit-maximisingfirm to a rise in demand
Short-run response of a profit-maximisingfirm to a rise in demand
MC
AR1
MR1
£
Q
P1
![Page 9: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/9.jpg)
AR1
MR1
P1
Q1
AR2
MR2
£
Q
MC
Short-run response of a profit-maximisingfirm to a rise in demand
Short-run response of a profit-maximisingfirm to a rise in demand
![Page 10: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/10.jpg)
AR1
MR1
P1
Q1
AR2
MR2Q2
P2
£
Q
MC
Short-run response of a profit-maximisingfirm to a rise in demand
Short-run response of a profit-maximisingfirm to a rise in demand
![Page 11: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/11.jpg)
Money and PricesMoney and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
![Page 12: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/12.jpg)
Money and PricesMoney and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
![Page 13: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/13.jpg)
O
AS
Pric
e le
vel
National output
Y
Different aggregate supply curvesDifferent aggregate supply curves
![Page 14: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/14.jpg)
P1
O
Pric
e le
vel
National output
AD1
Y
AS
Different aggregate supply curvesDifferent aggregate supply curves
![Page 15: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/15.jpg)
O
P1
Pric
e le
vel
National output
AD2
P2
Y
AS
AD1
Different aggregate supply curvesDifferent aggregate supply curves
![Page 16: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/16.jpg)
Money and PricesMoney and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
– the interdependence of markets
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
– the interdependence of markets
![Page 17: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/17.jpg)
Money and PricesMoney and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
– the interdependence of markets
– the flexibility of prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
– the interdependence of markets
– the flexibility of prices
![Page 18: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/18.jpg)
O
Pri
ce le
vel
National output
AD1
SRAS1
(expected price level = P1)
P1
Q1
a
The long-run aggregate supply curvewhen firms are interdependent
The long-run aggregate supply curvewhen firms are interdependent
![Page 19: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/19.jpg)
O
Pri
ce le
vel
National output
AD1
SRAS1
(expected price level = P1)
P1
AD2
a
bP2
Q2
SRAS2
(expected price level = P3 )
P3
c
Q1
The long-run aggregate supply curvewhen firms are interdependent
The long-run aggregate supply curvewhen firms are interdependent
![Page 20: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/20.jpg)
O
Pri
ce le
vel
National output
AD1
SRAS1
(expected price level = P1)
P1
Qn
AD2
a
bP2
Q2
SRAS2
(expected price level = P3 )
cP3
LRAS
The long-run aggregate supply curvewhen firms are interdependent
The long-run aggregate supply curvewhen firms are interdependent
![Page 21: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/21.jpg)
Money and PricesMoney and Prices
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
– the interdependence of markets
– the flexibility of prices
• the effects of investment on aggregate supply
• Assumptions about output and prices
– the short-run aggregate supply curve
• relatively elastic in short run
– stickiness of wages and prices
– confidence
– the long run aggregate supply curve
• relatively inelastic
– the interdependence of markets
– the flexibility of prices
• the effects of investment on aggregate supply
![Page 22: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/22.jpg)
Effect of investment on the long-run AS curveEffect of investment on the long-run AS curve
AD1
Pri
ce le
vel
National output
a
AS1 (short run)
![Page 23: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/23.jpg)
AS (long run)
AS2 (short run)
AD1
Pri
ce le
vel
National output
a
AD2
b
d
AS1 (short run)
Effect of investment on the long-run AS curveEffect of investment on the long-run AS curve
![Page 24: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/24.jpg)
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
• Expectations augmented Phillips curve– adaptive expectations
• Expectations augmented Phillips curve– adaptive expectations
![Page 25: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/25.jpg)
O
P (%).
U (%)
aP1
.
U1
P2
.
U2
A Phillips curveA Phillips curve
b
![Page 26: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/26.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 27: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/27.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 28: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/28.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 29: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/29.jpg)
0
4
8
12
16
20
0
P (%).
U (%)6 8I (Pe = 0)
.
b
The accelerationist theory of inflationThe accelerationist theory of inflation
a
![Page 30: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/30.jpg)
IV (Pe = 12%).
III (Pe = 8%).
II (Pe = 4%)
P (%).
U (%)6
a
b c
d
8I (Pe = 0)
.
.
e
The accelerationist theory of inflationThe accelerationist theory of inflation
f
0
4
8
12
16
20
0
![Page 31: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/31.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 32: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/32.jpg)
Un
0
4
8
12
16
20
0
P (%).
U (%)6 8
The long-run Phillips curveThe long-run Phillips curve
![Page 33: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/33.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 34: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/34.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
0
P (%).
U (%)8 13
J
X (Pe = 20%).
k
The effects of deflationThe effects of deflation
![Page 35: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/35.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
0
P (%).
U (%)8 13
k
X (Pe = 20%).
XI (Pe = 18%).
XII (Pe = 16%).
l
J
m
The effects of deflationThe effects of deflation
![Page 36: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/36.jpg)
0
2
4
6
8
10
12
14
16
18
20
22
24
0
P (%).
U (%)8 13
k
l
m
a
J
The effects of deflationThe effects of deflation
![Page 37: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/37.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
• Phillips loops
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
• Phillips loops
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 38: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/38.jpg)
Year 20
20
0
P (%).
U (%)Un
ab
c
Year 0, 1
Clockwise Phillips loopsClockwise Phillips loops
![Page 39: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/39.jpg)
Year 5
Year 4
0
20
0
P (%).
U (%)Un
ab
c
d
ef
Year 0, 1
Year 2
Year 3
Clockwise Phillips loopsClockwise Phillips loops
![Page 40: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/40.jpg)
0
20
0
P (%).
U (%)Un
ab
c
d
ef
h
i
J
Year 0, 1, 10
Year 2, 9
Year 3, 8
Year 4, 7
Year 5, 8
Clockwise Phillips loopsClockwise Phillips loops
g
![Page 41: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/41.jpg)
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
• Phillips loops
• Policy implications
• Expectations augmented Phillips curve– adaptive expectations
• The accelerationist theory– accelerating inflation
• when unemployment is kept below the ‘natural’ level
– the long-run Phillips curve
– effects of deflationary policies
• Phillips loops
• Policy implications
Inflation and Unemployment: Introducing ExpectationsInflation and Unemployment: Introducing Expectations
![Page 42: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/42.jpg)
Inflation and Unemployment: New Classical ViewsInflation and Unemployment: New Classical Views
• Assumption of flexible wages and prices
• Rational expectations– meaning of rational expectations
– imperfect information
– implications for AS and the Phillips curve
– policy implications
• Real business cycles– fluctuations in aggregate supply
– causes of changes in aggregate supply
– policy implications
• Assumption of flexible wages and prices
• Rational expectations– meaning of rational expectations
– imperfect information
– implications for AS and the Phillips curve
– policy implications
• Real business cycles– fluctuations in aggregate supply
– causes of changes in aggregate supply
– policy implications
![Page 43: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/43.jpg)
Inflation and Unemployment: Keynesian ViewsInflation and Unemployment: Keynesian Views
• Changes in equilibrium unemployment– structural unemployment– hysteresis
• The persistence of demand-deficient unemployment– payment of efficiency wages– insider power
• Incorporation of expectations– expansion of aggregate demand– contraction of aggregate demand
• Keynesian criticism of non-intervention
• Changes in equilibrium unemployment– structural unemployment– hysteresis
• The persistence of demand-deficient unemployment– payment of efficiency wages– insider power
• Incorporation of expectations– expansion of aggregate demand– contraction of aggregate demand
• Keynesian criticism of non-intervention
![Page 44: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/44.jpg)
Common ground between economists?Common ground between economists?
• Short-run effect of changes in AD– major effect on output and employment
– relatively small effect on prices
• Long-run effect of changes in AD– relatively small effect on output and jobs
– relatively large effect on prices
– some Keynesians disagree• stress long-run effects of changes in AD on
investment
• Importance of expectations
• Short-run effect of changes in AD– major effect on output and employment
– relatively small effect on prices
• Long-run effect of changes in AD– relatively small effect on output and jobs
– relatively large effect on prices
– some Keynesians disagree• stress long-run effects of changes in AD on
investment
• Importance of expectations
![Page 45: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/45.jpg)
Demand-side PolicyDemand-side Policy
• Attitudes towards demand management
• Case against discretion– time lags
– problem of over-correction
– government may ignore long-term consequences
• Case for rules– help to reduce inflationary expectations
– create a stable environment for investment and growth
• Attitudes towards demand management
• Case against discretion– time lags
– problem of over-correction
– government may ignore long-term consequences
• Case for rules– help to reduce inflationary expectations
– create a stable environment for investment and growth
![Page 46: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/46.jpg)
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiencesof 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
![Page 47: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/47.jpg)
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiencesof 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
![Page 48: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/48.jpg)
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiencesof 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
![Page 49: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/49.jpg)
Source: The Use of Explicit Targets for Monetary Policy: Practical Experiencesof 91 economies in the 1990s, (Bank of England, August 1999)
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
Who sets explicit targets and monitoring ranges forthe exchange rate, money and inflation
![Page 50: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/50.jpg)
Demand-side PolicyDemand-side Policy
• Case against rules– can cause severe fluctuations in interest
rates and can cause greater instability
– which rule to choose?
– rules may conflict
– rules may become unsuitable
• Case for discretion– fine tuning can be improved by better
forecasting and quick-acting policies
– allows governments to respond to changing circumstances
• Case against rules– can cause severe fluctuations in interest
rates and can cause greater instability
– which rule to choose?
– rules may conflict
– rules may become unsuitable
• Case for discretion– fine tuning can be improved by better
forecasting and quick-acting policies
– allows governments to respond to changing circumstances
![Page 51: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/51.jpg)
Demand-side PolicyDemand-side Policy
• Demand-side policy in the UK– increasingly rules-based
– fiscal policy• 'golden rule'
• but some flexibility
– monetary policy• target of 2% inflation set by government
• Monetary Policy Committee adjusts interest rates to meet this 2% target
• benefits of transparency
• benefits for expectations
• Demand-side policy in the UK– increasingly rules-based
– fiscal policy• 'golden rule'
• but some flexibility
– monetary policy• target of 2% inflation set by government
• Monetary Policy Committee adjusts interest rates to meet this 2% target
• benefits of transparency
• benefits for expectations
![Page 52: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/52.jpg)
Long-term Economic GrowthLong-term Economic Growth
• Growth over the decades• Growth over the decades
![Page 53: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/53.jpg)
30
40
50
60
70
80
90
100
110
120
1950 1960 1970 1980 1990 2000
Re
al
GD
P (
19
95
= 1
00
)UK GDP at market prices (1995=100)UK GDP at market prices (1995=100)
![Page 54: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/54.jpg)
30
40
50
60
70
80
90
100
110
120
1950 1960 1970 1980 1990 2000
Re
al
GD
P (
19
95
= 1
00
)UK GDP at market prices (1995=100)UK GDP at market prices (1995=100)
![Page 55: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/55.jpg)
Long-term Economic GrowthLong-term Economic Growth
• The causes of economic growth
– increase in quantity of factors
– increase in productivity of factors
• Capital accumulation
– a simple model of economic growth
• effect of an increase in capital
• diminishing returns
• steady-state national income
• The causes of economic growth
– increase in quantity of factors
– increase in productivity of factors
• Capital accumulation
– a simple model of economic growth
• effect of an increase in capital
• diminishing returns
• steady-state national income
![Page 56: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/56.jpg)
K0
Depreciation (D)
Investment (I)
Steady-state outputSteady-state output
Capital stock (K)
Ou
tpu
t (Y
), In
vest
me
nt (
I), D
epre
cia
tion
(D
)
K1
Y1
Output (Y)
g
Y0
bI0
D0
O
c
f
a
![Page 57: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/57.jpg)
Long-term Economic GrowthLong-term Economic Growth
• The causes of economic growth
– increase in quantity of factors
– increase in productivity of factors
• Capital accumulation
– a simple model of economic growth
• effect of an increase in capital
• diminishing returns
• steady-state national income
– effect of an increase in the saving rate
• The causes of economic growth
– increase in quantity of factors
– increase in productivity of factors
• Capital accumulation
– a simple model of economic growth
• effect of an increase in capital
• diminishing returns
• steady-state national income
– effect of an increase in the saving rate
![Page 58: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/58.jpg)
Capital stock (K)
K1 K2
Y2
Y1
Y
D
I2
I1g
m
nh
Ou
tpu
t (Y
), In
vest
me
nt (
I), D
epre
cia
tion
(D
)
f
Effect of an increase in the rate of saving and investmentEffect of an increase in the rate of saving and investment
![Page 59: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/59.jpg)
Long-term Economic GrowthLong-term Economic Growth
• Technological progress– effect on steady-state output
• Technological progress– effect on steady-state output
![Page 60: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/60.jpg)
Capital stock (K)
K1 K2
Y2
Y2
D
I2
I1g
p
nh
Ou
tpu
t (Y
), In
vest
me
nt (
I), D
epre
cia
tion
(D
)Effect of a technological advanceEffect of a technological advance
Y1
Y1
f
![Page 61: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/61.jpg)
Long-term Economic GrowthLong-term Economic Growth
• Technological progress– effect on steady-state output– endogenous growth theory
• Technological progress– effect on steady-state output– endogenous growth theory
![Page 62: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/62.jpg)
Long-term Economic GrowthLong-term Economic Growth
• Productivity and economic growth
– importance of productivity
– determinants of productivity
• private investment
• public investment in infrastructure and education
• innovation
• business environment
• management and entrepreneurial activity
• Productivity and economic growth
– importance of productivity
– determinants of productivity
• private investment
• public investment in infrastructure and education
• innovation
• business environment
• management and entrepreneurial activity
![Page 63: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/63.jpg)
Supply-side PolicySupply-side Policy
• The use of supply-side policies
– to reduce unemployment
– to reduce inflation
– to increase economic growth
• Market-orientated supply-side policies
– reducing government expenditure
• The use of supply-side policies
– to reduce unemployment
– to reduce inflation
– to increase economic growth
• Market-orientated supply-side policies
– reducing government expenditure
![Page 64: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/64.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 65: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/65.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 66: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/66.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 67: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/67.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 68: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/68.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 69: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/69.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 70: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/70.jpg)
Government expenditure (central plus local) as a percentage of GDP
Government expenditure (central plus local) as a percentage of GDP
![Page 71: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/71.jpg)
Supply-side PolicySupply-side Policy
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
![Page 72: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/72.jpg)
Supply-side PolicySupply-side Policy
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
![Page 73: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/73.jpg)
Supply-side PolicySupply-side Policy
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• importance of incentives
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• importance of incentives
![Page 74: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/74.jpg)
Supply-side PolicySupply-side Policy
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• importance of incentives
• effects on imports
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• importance of incentives
• effects on imports
![Page 75: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/75.jpg)
Supply-side PolicySupply-side Policy
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• importance of incentives
• effects on imports
• tax cuts for business
• Market-orientated supply-side policies
– reducing government expenditure
– tax cuts
• effects on labour supply and employment
• importance of incentives
• effects on imports
• tax cuts for business
![Page 76: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/76.jpg)
Supply-side PolicySupply-side Policy
• Market-orientated supply-side policies (cont.)
– reducing the power of labour
– reducing welfare
– policies to encourage competition
• privatisation
• deregulation
• introducing market relationships into the public sector
• the Private Finance Initiative
• free trade and capital movements
• Market-orientated supply-side policies (cont.)
– reducing the power of labour
– reducing welfare
– policies to encourage competition
• privatisation
• deregulation
• introducing market relationships into the public sector
• the Private Finance Initiative
• free trade and capital movements
![Page 77: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/77.jpg)
Supply-side PolicySupply-side Policy
• Background to interventionist policy
– the UK's poor productivity record
• Background to interventionist policy
– the UK's poor productivity record
![Page 78: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/78.jpg)
Productivity in selected countries, 2001 (UK = 100)Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
![Page 79: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/79.jpg)
Productivity in selected countries, 2001 (UK = 100)Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
![Page 80: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/80.jpg)
Productivity in selected countries, 2001 (UK = 100)Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
![Page 81: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/81.jpg)
Productivity in selected countries, 2001 (UK = 100)Productivity in selected countries, 2001 (UK = 100)
Source: Budget 2003, Economic and Fiscal Strategy Report (HM Treasury, 2003)
![Page 82: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/82.jpg)
Supply-side PolicySupply-side Policy
• Background to interventionist policy
– the UK's poor productivity record
– the UK's poor investment record
• Background to interventionist policy
– the UK's poor productivity record
– the UK's poor investment record
![Page 83: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/83.jpg)
Gross fixed capital formation as % of GDPGross fixed capital formation as % of GDP
![Page 84: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/84.jpg)
Gross fixed capital formation as % of GDPGross fixed capital formation as % of GDP
![Page 85: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/85.jpg)
Gross fixed capital formation as % of GDPGross fixed capital formation as % of GDP
![Page 86: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/86.jpg)
Gross fixed capital formation as % of GDPGross fixed capital formation as % of GDP
![Page 87: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/87.jpg)
Gross fixed capital formation as % of GDPGross fixed capital formation as % of GDP
![Page 88: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/88.jpg)
Gross fixed capital formation as % of GDPGross fixed capital formation as % of GDP
![Page 89: unemployment.ppt](https://reader035.fdocuments.us/reader035/viewer/2022062614/5473efbdb4af9f617d8b45d6/html5/thumbnails/89.jpg)
Supply-side PolicySupply-side Policy
• Interventionist supply-side policy– failure of the market to provide adequate
training, R&D and investment
– help to firms• direct provision
• finance for research and development
• assistance to small firms
• advice and persuasion
• information
– infrastructure development
– training and education
• Interventionist supply-side policy– failure of the market to provide adequate
training, R&D and investment
– help to firms• direct provision
• finance for research and development
• assistance to small firms
• advice and persuasion
• information
– infrastructure development
– training and education