Macroeconomic Framework Macroeconomics is a branch of economics that deals with the performance, structure, and behaviour of the economy as a whole

Mixed Economy A mixed economy is an economy that has a mix of economic systems. It is usually defined as an economy that contains both private-owned and state- owned enterprises or that combines elements of capitalism and socialism, or a mix of market economy and command economy.

Business Cycles The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.

Importance of Business Confidence Consumer confidence correlates closely with joblessness, inflation, and real incomes. The growth of help wanted advertising as measured by the Conference Board has also been a strong contributor to consumer confidence. Rising stock market prices can also boost consumer confidence. Why follow business confidence? Understanding shifts in business confidence is essential at times like the current period when the economy is at inflection point. This is all the more true given the wide disparities that have persisted between the mood and behaviour of consumers and businesses.

Business Cycle Peak Recession Trough Recovery Time Income

Types of Business Cycle Traditional business cycle models The Kitchin inventory cycle (3-5 years) The Juglar fixed investment cycle (7-11 years) The Kuznets infrastructural investment cycle (15-25 years) The Kondratieff wave or cycle (45-60 years). Juglar cycle In the Juglar cycle, which is sometimes called "the" business cycle, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices.

Types of Business Cycle Politically based business cycle models derive the business cycle from political decisions. The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on Polling Day continued

Government Policy Objectives What are the major objectives of macroeconomic policy? The four major objectives are: (i) Price stability (ii) Full employment (iii) A high, but sustainable, rate of economic growth (iv) Keeping the Balance of Payments in equilibrium

Conflicts between these objectives? 1. Healthy growth and low inflation e.g. If an economy grows too quickly, especially if it is due to excessive consumer spending as it tends to be in the UK, then demand will outstrip supply and prices will rise. 2. Healthy growth and a Balance of Payments equilibrium e.g. When an economy is growing quickly, consumer spending tends to be high. Hence, import growth picks up relative to exports, leading to a worsening trade deficit. 3. Low unemployment (or full employment) and low inflation e.g. If a government tries to reduce unemployment through reflationary measures, such as lower interest rates or increased public spending, then the resulting reduction in unemployment will push wages, and then prices, higher.

Government Policy Regional Policy Taxation - Income tax, Corporation tax, VAT(Fiscal Policy) Government Spending (Fiscal Policy) Money (Monetary Policy) Supply Side Policies Legal Framework (Employment laws, Business laws, Consumer laws) Trading (other countries) The Environment (Transport, Urban, Housing)

Regional policy Government actions designed to influence local economies.

Indirect taxation A surcharge on price imposed on the sale of goods and services by the government. Indirect taxes are therefore taxes on expenditure. Examples of indirect taxes in the UK include VAT and taxes on alcohol, tobacco and petrol.

Direct taxes These are taxes on income. The main direct tax in the UK is income tax.

Fiscal policy The stance taken by government with regard to its spending or taxation with a view to influencing the level of economic activity. An expansionary (or reflationary) fiscal policy could mean: 1...cutting levels of direct or indirect tax 2...increasing government expenditure The effect of these policies would be to encourage more spending and boost the economy. A contractionary (or deflationary) fiscal policy could be: 1...increasing taxation - either direct or indirect 2...cutting government expenditure These policies would reduce the level of demand in the economy and help to reduce inflation.

Monetary policy The use by government of changes in the supply of money and interest rates to achieve desired economic policy objectives. The government may want to use their monetary policy to either boost economic activity (if the economy is in a recession) or perhaps to reduce economic activity (if the economy is growing too fast, causing inflation). If they want to slow down the economy they may use contractionary (or deflationary) monetary policy. This is likely to mean: 1...increasing the level of interest rates 2...reducing the rate of growth of the money supply On the other hand if they want to boost the economy because it is in a downturn, they may choose to use expansionary (or reflationary) monetary policy. This would mean: 1...reducing the level of interest rates 2...allowing the rate of growth of the money supply to increase

Supply side policies Government policies which create incentives for individuals and firms to increase their productivity. Supply-side policies are policies that improve the workings of markets. In this way they improve the capacity of the economy to produce. This should enable the economy to grow in a non- inflationary way. Supply-side policies may include improving education and training, reducing the power of trade unions and removing regulations.