Money, money, moneyMoney, money, moneyConflicting objectives?
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Homework due in….• 2 scenario
unemployment Q’s• Greg & Youth
unemployment
• Extra HWK owing
Policies to reduce unemployment
Demand and supply side approaches
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Policies to improve unemployment…
•Demand side policies– Monetary– Fiscal
•Supply side policies
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Economic policies
• Monetary policies
• Fiscal policies
• Can be used for either Demand side or Supply side stimulation
Interest Rates&
Quantitative easing
Taxation&
Government spending
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Demand side policies – how does each factor affect unemployment?
Dem
and
side
polic
ies
Lower interestrates
Lower directtax rates
Increased govt Spending on infrastructure
Increase New Dealbenefits
PM/MP/Royal ‘tour’ to Promote UK businesses
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Worksheet – how does each factor affect unemployment?
Dem
and
side
polic
ies
Lower interestrates
Lower directtax rates
Increased govt Spending on infrastructure
Increase New Dealbenefits
PM/MP/Royal ‘tour’ to Promote UK businesses
Which policies are
Monetary
And which are
Fiscal
?
Monetary
Fiscal
Fiscal
Fiscal
Fiscal
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Prince Andrew – trade envoy
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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)
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Supply side policies – how does each factor affect unemployment?
Supp
ly si
depo
licie
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
AS EconomicsAS Economics
Supply side policies – how does each factor affect unemployment?
Supp
ly si
depo
licie
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
Which policies are
Monetary
And which are
Fiscal
?Possible monetary incentives…
Fiscal
Fiscal
Fiscal
Fiscal
Phillips curveKey theory for Analysis &
evaluation…
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Aims• To understand the consequences of
unemployment and inflation
• To be aware of the concept of the Phillips Curve.
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What’s the relationship here?
What are the consequences of falling unemployment?
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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?
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So what would happen if there was a fall in unemployment?
What would be the
positive consequences?
What would be the
negative consequences?
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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?
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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
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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
Lower directtax rates
Increased govt spending on infrastructure
Increase New Dealbenefits
PM/MP/Royal ‘tour’ to Promote UK businesses
Increased 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
How does each of these affect
inflation?
Demand Pull Inflation
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Demand Pull Inflation
Price Level
Real National Output
Y1
LRAS
Y2
AD1
0
AD
SRAS
In the LR, workers are not
willing to sacrifice Leisure time for
more overtime…. But still have
high wage expectations….
demand pull inflation
SRAS2
Known as DEMAND PULL
INFLATION
Cost push inflation
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Draw an Classical AD/AS diagram
Price Level
Real National Output
Y1
LRAS
0
AD
SRAS1
SRAS2
Y2
The Phillips Curve.
Old theory!!!
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The Phillips Curve You need to use this diagram in an exam
Q on inflation & unemployment
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Old data…
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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.
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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?
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Non-inflationary growth
Price LevelLRAS LRAS2
Yfc1 Yfc2
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Non-inflationary growth
Price LevelLRAS LRAS2
AD1 AD2
Vital diagram
What govt
wants to achieve!
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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
Per
cent
0
1
2
3
4
5
6
7
8
9
10
Unemployment
Inflation
The inverse relationship has now gone! (A2 Ec theory!)
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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
’