f1 Acca Lesson10

Session Objectives
Topic 10
Define macro-economic policy
Explain the main determinants of the
Macroeconomic Factors level of business activity in the economy
and how variations in the level of
business activity affect individuals,
households and businesses
© accountingclassroom.com 2008 Student Notes for ACCA F1-Accountant in Business © accountingclassroom.com 2008 Student Notes for ACCA F1-Accountant in Business
Session Objectives Session Objectives
Explain the impact of economic issues Describe the main types of economic
on the individual, the household and the policy that may be implemented by
business: government and supra-national bodies to
i) Inflation maximise economic welfare
ii) Unemployment Recognise the impact of fiscal and
iii) Stagnation monetary policy measures on the
iv) International payments disequilibrium individual, the household and
businesses
Difference between Macro- and
Macroeconomics
Micro-economics
It is the study of how society allocates Microeconomics –study of economic
scarce resources which have alternative behaviour of individual consumers, firms
uses, between competing ends. and industries
It focuses on: Macroeconomics – Considers
Overall demand for goods and services aggregate behaviour and the sum of
Output of goods and services individual economic decisions
Supply of factors of production
Total incomes earned by providers of factors
of production
Macroeconomic Policy Factors Influencing Level of

Objectives Business Activity
Economic Growth Confidence
Inflation Aggregate demand
Unemployment Capital
Balance of Payments Use of Resources
Government Policy
Exchange Rate Movements
Confidence Aggregate Demand
Greater Consumer confidence lead to It is the total demand for the country’s
higher business confidence and higher output
investment in new factories It is calculated as:
Confidence is adversely affected by AD = Consumer spending + Investment by
political instability, disasters, firms + Government spending + Demand
unemployment, inflation from exports – imports
Higher demand results in firms
increasing output
Higher demand can result in inflationary
pressure
Capital Use of Resources
Firms need finance to invest in new New Technology and more efficient
projects working practices can improve
Greater availability of finance results in productivity and lower costs
higher investments Advances in level of education
Lower interest rates will make capital
cheaper
Government Policy Exchange Rate Movements
Governments can increase or decrease Strengthening currency will make a

the level of aggregate demand through country’s exports more expensive
fiscal policy Imports will get cheaper
Investment in the infrastructure of the
economy can attract investment
Trade Cycles Trade Cycles
Recession starts when demand begins

to fall.
Reduction in demand feeds into
household incomes and the economy
moves into a slump
Slowly economic activity begins to
pickup and the economy moves to
recovery.
The economy will expand pushing
upwards into boom.
Stagnation and Economic
Problems with Growth
Growth
Growth implies: Growth may not keep up with population growth
More goods demanded and produced Growth rates should exceed inflation rates for
People earn more and can afford more benefits to arise
goods Growth may be in illegal goods like drugs
More people should have jobs Gap between haves and have nots may grow
Measurement of growth is difficult given the
existence of black market
Rapid growth means rising incomes and leads
to imports thus worsening BOP condition
Inflation Unemployment
Government wants stable prices and low Unemployment is a problem because:

inflation because: Unemployment benefits
Inflation causes uncertainty and stifles Rise in crime
investment Waste of human resources
Not all incomes rise in line with inflation
Inflation may cause civil unrest
Balance of Payment Economic Policy Options
It is a statement of the balance of a Fiscal Policy options

country's trade and financial transactions Monetary policy options
with the rest of the world over a specific Demand and supply side policies
period - usually a year.
A long-term trade deficit needs to be
financed.
A long-term trade can lead to inflationary
surpluses leading to loss in international
confidence
Fiscal Policy options Fiscal Policy options
Fiscal policy refers to government’s

taxation and spending plans. It
includes:
A balanced budget: In the medium to
long term, government should aim to
achieve a balanced budget
Government income = Government
Expenditure
Running a Budget Deficit Running a Budget Deficit
Govt income < Govt expenditure = Deflationary gap is said to exist when
Budget deficit the current equilibrium level of national
Budget deficit is financed through income is too low to provide
borrowing employment opportunities for all those
It is referred to as the Public Sector Net seeking work
Cash Requirement The government follows an
It is often used to close a deflationary expansionary policy to boost demand
gap and reduce unemployment
Running a Balanced Surplus Monetary Policy Options
Govt income > Govt expenditure = Monetary policy refers to management

Budget surplus of money supply in the economy.
This may lead to inflation It can involve:
Inflationary gap exists Changing interest rates
Government follows a contractionary Setting reserve requirements for banks
policy to reduce aggregate demand Trading in foreign exchange markets
Expansionary / Contractionary
Money Supply
Monetary Policy
Expansionary increases the money Money supply is the total amount of
supply and contractionary decreases it money in the economy.
Expansionary combats unemployment Measures of money supply include:
in a recession and contractionary raises M0 = Notes and coins in circulation and
interest rates to combat inflation balances at the country’s Central Bank
M4= Notes and coins and all private sector
sterling bank / building society deposits
Reserve Requirements Open Market Operations
Banks operate a fractional reserve By buying and selling its own bonds the
system. government is able to exert some
Only a part of their deposit is kept in control over the money supply
cash. By buying back its bonds, it will release
The proportion of deposits retained in more cash
cash is known as the reserve asset By selling it will reduce the money in
ratio or liquidity ratio. circulation
Demand and Supply Side
Interest Rates
Policies
High interest rates suppress demand o Classical view (Do nothing)
for money due to increased cost of o Keynesian View (Demand Side)
borrowing. Over a period of time the o Monetarist view (Supply Side)
money supply will react to this reduced
demand for money by contracting.
In UK interest rates are set by Central
bank
Achieving Policy Objectives: Achieving Policy Objectives:

Growth Unemployment
Cut interest rates Cyclical unemployment
Running a budget deficit Unemployment is due to small demand to
create employment
Supply side policies (Increase the
Monetarist can reduce this unemployment
availability of skilled labour through by supply-side measures
training schemes etc
Frictional Unemployment
Others: People who move from job to job are short
Protectionist measures to reduce imports term unemployed
Creating a stable economy Can be reduced by a provision of better
Tax incentives to boost growth information through job centres and supply
policies
Unemployment Unemployment
Structure and Technological Seasonal Unemployment
Unemployment Creates highly seasonal demand for
Caused due to structural change in workers
economy leading to change in skills Real Wage Unemployment
required
Occur in industries that are highly
Supply side policies will be more effective unionised
• Government funded retraining schemes
By keeping wages artificially high by the
• Business start up advice and soft loans
threat of strike action and closed shops, the
• Help with worker relocation costs
number of people employed in the industry
• Improved information on employment
is reduced
opportunities

Inflation Inflation
Demand-pull inflation Cost-push inflation
If demand for goods and services in the If the underlying cost of factors of
economy is growing faster than the ability production increases, this is likely to be
of the economy to supply these goods and reflected in an increase in output prices as
services, prices will increase firms seek to maintain their profit margin
Demand side policies would focus on
reducing aggregate demand through tax
rises, cuts in government spending and
higher interest rates
Inflation Inflation
Imported inflation Monetary inflation
A weakening of the national currency will Inflation can result from over expansion of
increase the cost of imports and lead to money supply as it increases the
domestic inflation purchasing power
This can be reduced by policies to If the expansion is faster than the supply of
strengthen the national currency goods it will lead to inflation
Achieving Policy Objectives:

Balance of Payments
Balance of Payment Deficits
Expenditure reducing strategies: Shrink
the domestic economy and thus reduce
demand for imports
Expenditure switching strategies:
• Import controls
• Boost exports
• Lower exchange rates or devaluation in case of
fixed exchange rates
© accountingclassroom.com 2008 Student Notes for ACCA F1-Accountant in Business

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Session Objectives

Session Objectives Session Objectives

Macroeconomic Policy Factors Influencing Level of

Capital Use of Resources

Governments can increase or decrease Strengthening currency will make a

Trade Cycles Trade Cycles

Recession starts when demand begins

Government wants stable prices and low Unemployment is a problem because:

It is a statement of the balance of a Fiscal Policy options

Fiscal Policy options Fiscal Policy options

Fiscal policy refers to government’s

Running a Balanced Surplus Monetary Policy Options

Govt income > Govt expenditure = Monetary policy refers to management

Reserve Requirements Open Market Operations

Achieving Policy Objectives: Achieving Policy Objectives:

Achieving Policy Objectives: Achieving Policy Objectives:

Achieving Policy Objectives:

© accountingclassroom.com 2008 Student Notes for ACCA F1-Accountant in Business

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