Macroeconomics

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28 Οκτ 2013 (πριν από 4 χρόνια και 11 μέρες)

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1

MACROECONOMICS


Introduction


M
acroeconomics is the study of the economy viewed as a single interactive system. It is
concerned, not with
individual transactions
, but with
aggregate

indicators
, including

gross domestic product

(
GDP
)
,
price indices
,

and
une
mployment rate
s
. At the
theoretical level it seeks to explain
the complex relationships between
factors such as
national income
,
output
,
consumption
,
unemployment
,
inflation
,
savings
,
investment
,
international trade

and
international finance
. At the a
pplic
ation

level
,
it
tests competing theories against the evidence provided by
econo
mic statistics

and
estimates

the
numerical relationships

required to construct
forecasting models

in order
to develop

policies

that could

promote
full employment
,
economic stabi
lity

and
economic
growth

while preventing
economic recession

and
economic depression
.


Macroeconomic
Theory



The
business cycle

or
trade cycle

is a permanent feature of
market economies
: gross
domestic product

fluctuates as
booms

and
recessions

succeed ea
ch other. During a boom,
an economy
expands

to the point where it is working at
full capacity
, so that
production
,
employment
,
prices
,
profits
,
investment

and
interest rates

all tend to rise.
During a recession, the
demand for goods and services

declines

a
nd the economy
begins to work at below its potential. Investment, output, employment, profits,
commodity and share prices, and interest rates generally fall. A serious, long
-
lasting
recession is call
ed a
depression

or a
slump
. The highest point i
n the busi
ness cycle is
called a
peak
, which is followed by a
downturn
or

downswing

or a period of
contraction
. The lowest point on the business cycle is called a
trough
, which is followed
by a
recovery

or an
upturn

or
upswing

or a period of expansion. Economists so
metimes
describe contraction as '
negative growth
'.


Management of the Economy


Tackling unemployment


The classical economists believed that nothing could be done to reduce unemployment
except by reducing
labour
market rigidities
. Keynesians believe tha
t any tendency for
demand to fall below the level necessary for full employment can be corrected by
increased
public expenditure

or
reduced taxation
. That would be partly effected
without specific government action by the operation of the economy’s automat
ic
stabilisers
. Monetarists recommend using a combination of automatic stabilisers and
supply
-
side

measures. However, a
fiscal stimulus

can quickly boost
spending power
,
whereas
monetary policy

acts with long and uncertain lags. Discretionary fiscal policy

has often been used to regulate
developed economies

but, because of legislative delays it
has sometimes had a destabilising effect because the stimulus arrived when activity was
recovering. A study by economists at the International Monetary Fund has show
n that a
fiscal stimulus package equivalent to 1 percent of country's GDP is associated on average

2

with GDP increases of about 0.1 to 0.2 percent. In
advanced economies
, the longer
-
term
effects are also positive and even possibly higher. But the longer
-
ter
m effects are
typically

negative in
emerging economies
.



Controlling inflation


In the 1970s Keynesian economists considered inflation to be mainly the consequence of
existing
wage bargaining systems
, and recommended
incomes policies

as a means of
contro
l. Incomes policies were tried in the USA and in Britain, but never had more than a
brief transitory effect on inflation. On the contrary, their ineffectiveness sometimes
generated adverse inflationary expectations that caused people to behave in ways that

gave impetus to the growth of inflation. As already noted, attempts to control inflation by
setting
money supply

targets were also unsuccessful. Current practice, described below,
uses published
inflation rate

targets and attempts to meet them using the
c
entral
b
anks'
power to control
interest rates
.


Current monetary policy


Under normal circumstances, monetary policy is nowadays targeted directly upon the
inflation rate and aims to maintain it within predetermined limits. It operates by use of the
cent
ral banks power to control interest rates. Briefly, an increase in interest rates
discourages borrowing and encourages savings. Because borrowers spend more than
savers, it discourages consumer spending, and higher mortgage payments reinforce its
effect by

leaving householders with less to spend. Since it takes about a year for interest
rate changes to affect output and two years to affect inflation, policy action depends upon
judgements of forthcoming inflation. The authorities make use of economic forecas
ting
models to assist those judgements, but they usually take account also of a range of factors
including inflationary expectations (as indicated by the differences between the prices of
fixed
-
interest and index
-
linked bonds) and the state of the housing
market. Regulatory
action depends mainly upon empirical data concerning the relation between the inflation
rate and the output gap.

Under exceptional circumstances such as a severe recession, a
credit crunch

or an impending deflation, monetary policy may
be used to create an
increase in the money supply by substantial reductions in interest rates, and
-

if that
action reduces its effectiveness
-

by the creation of money by a technique known as
quantitative easing
.