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Economics Online PowerPoint Show. Sample. The circular flow of income. Income in an economy flows from one part to another and back again, generating further incomes as it does so. Goods. Households use their income to buy private goods. Factors. £100b. Factor inputs are converted

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  1. Economics Online PowerPoint Show Sample

  2. The circularflow of income • Income in an economy flows from one part to another and back again, generating further incomes as it does so. Goods Households use their income to buy private goods Factors £100b Factor inputs are converted into an output by private firms £100b The circular flow is started when firms use factors. Assume they pay a total income to households (of £100b) for all the factors of production

  3. The trade cycle • Booms lead to: • Goods and service inflation • House price inflation • Wage inflation • Labour shortages • Falling savings • Excessive credit • Trade difficulties • Economic problems arise from the instabilityof the trade cycle. • Changes in real national income tend to be cyclical. It is desirable that this cycle is stable rather than unstable. • Comparing actual growth with the trend rate is useful for policy purposes. DEMAND SIDE POLICY Monetary policy Fiscal policy Exchange rate policy Regulates aggregate demand to stabilise the trade cycle Change in real national income Boom • Busts lead to: • Goods deflation • House price deflation • Labour surpluses • Unemployment • Excessive debt burden • Public sector debt Trend rate SUPPLY SIDE POLICY Incentives Welfare to work Education and skills Promotes long term growth Time Bust

  4. RPI and CPI – 1994 - 2010 • Targeting inflation • It is generally recognised that a small amount of inflation is acceptable. Between 1997, when the Bank of England was made independent, and 2004 the (RPI) target rate for inflation was 2.5%. • The CPI target • Since 2004, with the adoption of the CPI, the target has been 2%. The Bank of England must act by raising or lowering interest rates to achieve this target. RPI target 2.5% CPI target 2.0% Bank of England is made independent

  5. Summary of the monetary transmission mechanism Domestic demand TIGHTENS Domestic demand inflation Market interest rates RISE Inflationary PRESSURE EASED Total inflation FALL Asset prices Official interest rate A RATE INCREASE WORSEN Expectations Import prices FALL Import prices - cost inflation APPRECIATE Exchange rates

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