2.1 The Level of Overall Economic Activity

Economic Activity

          => C + I + G + (X-M) = C + S + (T-B)

          => I + G + X = S + (T-B) + M  

          => total injections = total leakages

The Business Cycle

2.2 Aggregate Demand and Aggregate Supply

Aggregate Demand

PL = Inflation

Aggregate Supply 


2.3 Macroeconomic Objectives

Low Unemployment

Low and Stable Rate of Inflation

Economic Growth

Equity in the Distribution of Income

2.4 Fiscal Policy

The Government Budget

Government spending :  Current( spending on factor payment and goods) Capital( investment, spending on assets)

Transfer payment ( a payment from government to  individual, no output is generated)

Government revenue: Direct taxes( taxes on income) indirect taxes ( taxes on expenditure),sales of good and services

Budget deficit is when total expenditure> total tax revenue

Budget surplus is when total expenditure <total tax revenue

National debt is the accumulation of all the past years deficits. A budget deficit will increase the size of the national debt. Vice versa.

The Role of Fiscal Policy 

Definition: Fiscal Policy is the use of government spending and taxation to influence AD, raised revenue, redistribute income and influence consumption pattern.

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2.5 Monetary Policy

Interest Rates

The Role of Monetary Policy

2.6 Supply-Side Policies

The Role of Supply-Side Policies

Supply-side policies focus on the production and supply side of the economy, specifically on the factors aimed at shifting the long-run aggregate supply (LRAS) or Keynesian AS curves to the right, which indicates an increase in the potential output and achieve long-term economic growth.

Supply-side policies focus on:

Interventionist Supply-Side Policies

Policies that are created because many believed that free market cannot increase the total potential output in a desired result.

Interventionist supply-side policy includes:

Market-Based Supply-Side Policies

Supply-side policies are believed to achieve rapid growth, price stability and full employment at the same time.

Market-based supply-side policies can be grouped under three headings:

  1. Encouraging competition
  1. Privatisation
  2. Deregulation
  3. Private financing of public sector projects
  4. Contracting out to the private sector (outsourcing)
  5. Restricting monopoly power
  6. Trade liberalisation
  1. Labour market reforms
  1. Abolishing minimum wage legislation
  2. Weakening the power of labour (trade) unions
  3. Reducing unemployment benefits
  4. Reducing job security
  1. Incentive-related policies
  1. Lowering personal income taxes
  2. Lowering taxes on capital gains and interest income
  3. Lowering business taxes

Evaluation of Supply-Side Policies