Introduction to Macroeconomics SBC Economics Introduction to Macroeconomics Learning outcome U Identify the main objectives of government economic policy Describe the main indicators of economic performance Explain the pattern of the UK economy over recent years Describe the main economic policy instruments Know the main schools of economic thought Explain the Keynesian model of the circular flow of income and expenditure Explain the workings of the circular flow model Explain what is meant by the national income equilibrium Explain the paradox of thrift Explain the importance of the multiplier Explain the limitations in the use of national income statistics Reading: Units 24 & 25

Economic policy The government can seek to affect the economy through using various policy instruments such as: Fiscal policy Monetary policy Supply-side policies Trade policy

Economic policy Fiscal policy The government controls the levels of: Government spending Taxation Borrowing

Economic policy Monetary policy The government controls: The interest rate Money supply Availability of credit

Economic policy Supply-side policies The government intervenes in the market to correct what it views as market failure Examples of intervention include: Privatisation Deregulation Increasing competition Regional policy

Economic policy Trade policy The government can seek to control the levels of imports and exports by using measures such as: Tariffs Quotas Trade agreements

Schools of economic thought Obviously not economists agree about how best to manage an economy. The different ideas can be broadly split into five different groups, namely: Classical Neo-Classical Keynesian Neo-Keynesian Monetarist

Classical Classical economics refers to work done by a group of economists in the 18th and 19th centuries. They developed theories about the way markets and market economies work. The study was primarily concerned with the workings of economic growth. It stressed economic freedom and promoted ideas such as laissez-faire and free competition.

Neo-Classical This approach was developed in the late 19th century. It is an approach to economics that relates supply and demand to an individual's rationality and his or her ability to maximize personal benefit. Neoclassical economics also increased the use of mathematical equations in the study of the economy.

Keynesian John Maynard Keynes provided a framework of ideas between 1900 and 1940. His theories stated that government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability.

Neo-Keynesian The next generation of Keynesian thinking added more microeconomic ideas to the macroeconomic theories. The results of this intellectual program would produce monetarism and other versions of macro-economics.

Monetarist School of economic thought that maintains that the money supply is the chief determinant of economic activity. Monetarism holds that a change in the money supply directly affects and determines production, employment, and price levels, though its influence is evident only over a long period of time.