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expenditure switching
policies, which transfer resources and expenditure away from 
imports and towards domestic products, while the last is an 
expenditure reducing
policy. 
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CHAPTER 3
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THE MACROECONOMIC ENVIRONMENT 
 
81 
 

 
Macroeconomics
is the study of the aggregated effects of the decisions of individual economic units 
(such as households or businesses). It looks at a complete national economy, or the international 
economic system as a whole 

 
There is a circular flow of income in an economy, which means that expenditure, output and income will 
all have the same total value. 

 
The economy is rarely in a stable state because of the various changing factors which influence it. These 
include investment levels, the multiplier effect, inflation, savings, confidence, interest rates and 
exchange rates. 

 
Equilibrium national income
is determined using aggregate supply and aggregate demand analysis. 

 
Business cycles 
or 
trade cycles 
are the continual sequence of rapid growth in national income, followed 
by a slowdown in growth and then a fall in national income. After this recession comes growth again, 
and when this has reached a peak, the cycle turns into recession once more. 

 
High rates of 
inflation
are harmful to an economy. Inflation redistributes income and wealth. Uncertainty 
about the value of money makes business planning more difficult. Constantly changing prices impose 
extra costs. 

 
Demand pull inflation
arises from an excess of aggregate demand over the productive capacity of the 
economy. 
