Money, money, money Conflicting objectives?. AS Economics Homework due in. 2 scenario unemployment...

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Money, money, moneyMoney, money, moneyConflicting objectives?

AS EconomicsAS Economics

Homework due in….• 2 scenario

unemployment Q’s• Greg & Youth

unemployment

• Extra HWK owing

Policies to reduce unemployment

Demand and supply side approaches

Policies to improve unemployment…

•Demand side policies– Monetary– Fiscal

•Supply side policies

Economic policies

• Monetary policies

• Fiscal policies

• Can be used for either Demand side or Supply side stimulation

Interest Rates&

Quantitative easing

Taxation&

Government spending

Demand side policies – how does each factor affect unemployment?

Lower interestrates

Lower directtax rates

Increased govt Spending on infrastructure

Increase New Dealbenefits

PM/MP/Royal ‘tour’ to Promote UK businesses

Worksheet – how does each factor affect unemployment?

Lower interestrates

Increased govt Spending on infrastructure

Which policies are

Monetary

And which are

Fiscal

Monetary

Fiscal

Prince Andrew – trade envoy

Demand side Policies to Reduce Unemployment• These are mainly measures to

boost total labour demand (reduce cyclical unemployment)– Lower interest rates (monetary policy)– A lower exchange rate (monetary policy) – Lower direct taxes (fiscal policy)– Government spending on major capital projects

(fiscal policy) – Employment subsidies (fiscal policy/ supply side)– Incentives to encourage flows of foreign investment

in the UK – (supply side policy)

Supply side policies – how does each factor affect unemployment?

sIncreased spending

on education & trainingBetter informationOn job availability

Increased tax free income &

working credits

Reduce corporation tax & remove

business red tape

PM/MP/Royal ‘tour’ to encourage inward investment into UK

Supply side policies – how does each factor affect unemployment?

sIncreased spending

on education & trainingBetter informationOn job availability

working credits

business red tape

Which policies are

Monetary

And which are

Fiscal

?Possible monetary incentives…

Fiscal

Phillips curveKey theory for Analysis &

evaluation…

Aims• To understand the consequences of

unemployment and inflation

• To be aware of the concept of the Phillips Curve.

What’s the relationship here?

What are the consequences of falling unemployment?

Consequence of falling unemployment on…

….the circular flow of income?

1st draw me a circular flow diagram!

What are the 2 main sectors?

Who’s at the top? Who’s at the bottom?

What are the initial flow of incomes?

What else happens?

So what would happen if there was a fall in unemployment?

What would be the

positive consequences?

What would be the

negative consequences?

What are the consequences of falling unemployment?

Did we cover these groups and issues?

On circular flow of income?

On balance of payments?

On govt finances?

On inflation?

Consequences of falling unemployment The circular flow and the multiplier:

– Incomes flowing into households will grow– Falling unemployment adds to demand and

creates a positive multiplier effect on incomes, demand and output.

The balance of payments:– When incomes and spending are growing,

there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen

Consequences of falling unemployment Government finances:

– With more people in work paying income tax, national insurance and value added tax, the government can expect a large rise in tax revenues and a reduction in social security benefits

Inflationary effects– Falling unemployment can also create a rise in

inflationary pressure – particularly when the economy moves close to operating at full capacity

– However this is not really a risk when the economy is coming out of recession, since aggregate supply is likely to be highly elastic because of a high level of spare capacity

Is there a trade off between….

Unemployment & Inflation…?

Give me ONE policy that Govt could use to reduce

unemployment?

Lower interestrates

Increased govt spending on infrastructure

Increased spending on

education & trainingBetter informationOn job availability

working credits

business red tape

How does each of these affect

inflation?

Demand Pull Inflation

Price Level

Real National Output

In the LR, workers are not

willing to sacrifice Leisure time for

more overtime…. But still have

high wage expectations….

demand pull inflation

Known as DEMAND PULL

INFLATION

Cost push inflation

Draw an Classical AD/AS diagram

Price Level

Real National Output

The Phillips Curve.

Old theory!!!

The Phillips Curve You need to use this diagram in an exam

Q on inflation & unemployment

Old data…

Phillips Curve

In 1958 AW Phillips plotted 95 years of data of UK wage inflation against unemployment. It seemed to suggest a short-run trade-off between unemployment and inflation. The theory behind this was fairly straightforward. Falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise.

HOW CAN GOVT INCREASE AD? (AD= C + I + G + (X-M))

If the Government wanted to reduce the unemployment rate, it could increase aggregate demand but, although this might temporarily increase employment, it could also have inflationary implications in both the labour and the product markets.

Phillips Curve – Macro Trade off

The opposite is true when unemployment is high- a large pool of surplus labour will mean that workers are willing to work for lower wages to guarantee themselves a job, and so firms, facing lower wage costs, can reduce price increases in their goods/services.

The explanation offered by Phillips was that when unemployment levels are low in an economy there will be a shortage of labour available for firms to employ. This will bid up wage prices, and firms will be forced to pass on these higher costs to consumers to maintain profit margins. Thus, price levels increase, and inflation rates rise.

In the long run… if it’s a supply side policy to reduce unemployment?

Non-inflationary growth

Price LevelLRAS LRAS2

Yfc1 Yfc2

Non-inflationary growth

Price LevelLRAS LRAS2

AD1 AD2

Vital diagram

What govt

wants to achieve!

unemployment and inflation rates - per centUnemployment and Inflation

Consumer Price Inflation [ar 12 months] Claimant Count UnemploymentSource: Reuters EcoWin

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Unemployment

Inflation

The inverse relationship has now gone! (A2 Ec theory!)

Homework…

Textbook p199 – 200

“Unemployment in Wolverhampton”

Do Q 2

“Discuss the economic costs that might be created by the redundancies to:

1. Individuals & families2. Local community3. Taxpayers4. UK economy

4 marks per ‘stakeholder

Money, money, money Conflicting objectives?. AS Economics Homework due in. 2 scenario unemployment...

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