Macroeconomics

Table of Contents

1. Topic pack - Macroeconomics - introduction
2. 2.1 The level of overall economic activity (notes)
3. 2.1 The level of overall economic activity (questions)
4. Section 2.2 Aggregate demand and supply (notes)
5. Section 2.2 Aggregate demand and supply (simulations and activities)
6. 2.2 Aggregate Demand and Aggregate Supply (questions)
7. 2.3 Macroeconomic objectives (notes)
8. Low Unemployment
9. 2.3 Macroeconomic objectives (questions)
10. 2.4 Fiscal policy (notes)
11. 2.4 Fiscal policy (questions)
12. 2.5 Monetary policy (notes)
    1. Monetary policy - introduction
    2. Interest rate determination and the role of a central bank
    3. Interest rate determination
    4. Case study
    5. Monetary policy and short term demand management
    6. The analogy of the balloon
    7. Interest rate changes & Aggregate Demand
    8. Monetary policy and inflation targeting
    9. Evaluation of monetary policy
    10. Case Study - The Credit Crunch
13. 2.5 Monetary Policy (questions)
14. Section 2.6 Supply-side policies (notes)
15. 2.6 Supply-side policies (questions)
16. Print View

The analogy of the balloon

To help imagine how these policies work, think of the economy as a balloon. The air in the balloon is the level of demand or economic activity. If the balloon is a little low and short of air, you want to reflate it; if it is over-expanded and in danger of bursting, then you deflate it.

This is similar to the economy. However, when an economy over-expands, instead of bursting, it suffers from other problems including higher inflation and a deteriorating balance of payments. Supply-side policies are policies that manage the capacity of the balloon: making it bigger so it can take more air or making the balloon material more 'stretchy', so it can expand further.

Contractionary Policies (Reducing aggregate demand)

Tight Fiscal Policy

• reducing governments spending
• Increasing taxation

Tight Monetary Policy

• Increase interest rates
• Reduce money supply

Expansionary Policies (Increasing Aggregate Demand)

Loose Fiscal Policy

• increasing government spending
• reducing taxation

Loose monetary policy

• decreasing interest rates
• increasing the money supply