Hello. Hello, how are you? Hello howeverything. I'm doing under good. Happy New Year. Happy New Year. Where are you? You're in the uk or you're in China? The uk. You're in the uk. Okay. She's spending Christmas in the uk. Okay, Yeah. Okay. So when do you go back to school? Go back to school. Fifth of January. Actually, I don't know. I happen to, I don't know myself, but I'll ask my friend. Sweet, okay, cool, okay, fantastic. Okay. So I haven't finished my breakfast yet, so it's kind of just like finished real quick, but Yeah it's one minute. Okay, okay okay okay. A't Fran戒. I'm back so we can see me. Perfect of it. Cool. We you finished term just before Christmas, right? And we did a few things in the previous month. Which topic at this point are you at least comfortable with? We. We do cover from like steam, two stuff high, it's like okay, but there's there only any area that you thought was not so good at school, for example. And then top opping it. Thing too, like the whole thing. Okay, I'll pick something then. Cool. So you did a bit of globalization. I think the last couple lessons was a bit more on the globalization trade front seem to. So I just see something from that. Maybe, well, maybe something that's not there. No. So I think that we did that was actually theme four that we did. Okay. So theme two, I don't think we've done so much monitoring fiscal policy, right? Right mariory Yeah. So let's do a bit of fiscal montary policy. I think look, what I want tell students story is the macro is very repeto the ada level. So macro can be basically can be simplified to the macro objectives. Okay. So for example, well, give me a couple macro objectives, Rory. Macro objective economic growth, stable inflation on one to 2%. Yeah so there's 270 economic growth. I guess it kind of says it in the name. I mean, I mean, at the end of the day, we don't want to kind of a growth, the saon growth we wanted, but like to increase living standards. But Yeah so it's an objective, like an indirect objective almost, although the most important one, stable low and stable inflation. Yeah one, 2%, roughly around 2% is the target rate that a lot of central banks have. Cool. So you've also got like unemployment targets rate. So low unemployment is what all countries warranty. Also got some objectives in terms of inequality and unemploand inequality sustainstability, right. Lorin, a couple out days again. So in macroeconomics, we've got those objectives. Okay, right. And then we've got policies to try and reach those objectives. Okay. What kind of policies do you think are the main ones? The main one is. The fistore monetary policy. Great. Those two, the big ones for sure. Yeah you've got supply side policies as well, which is but it is like the third one, but the relief of the sake of the a level course, it's like less important. It's probably the easiest. It's just to some extent spending but spending money to make the economy, let's say, better on supply side, right? So to make the economy productive, to make the economy more and more efficient, so you spend on education, on health, thcare spend, you maybe might subsidize certain like AI or certain new technologies. There's two different types of supply side policies, which I think we spoke about a couple lessons ago, interventionist supply side policies and market based supply support. Okay, cool. Fine. So let's go into fiscal monetary policy today. Okay. So one, go through fiscal. Okay. Why is fiscal policy important? So first of all, what is it okay? And two, why is it important, do you think? Because it's. This because. I think of that. Is it like government spending on tax? Government spending are not on tax, right? So define it. It's like I'm. No government use, the government would use the tax to spend on expenditure on government expenditure. Exactly. Spending and taxation, right? Yeah. So it's, as you probably said, the income, the government income is tax, tax rebuand simplify times tax revenue, right? Right. So this tax revenue is it should almost be equal to suspending to government spending. Not always. That's why we've got budget deficits or surpluses when the government doesn't balance the books, right? When the government overspends theyspend more than the tax revenue, when that's an issue. But Yeah, you're right. Basically the tax revenue is kind of somewhat like the gut spending. And Yeah, fiscal policy is the mix of the birth, again, mix of birth. So government spenand also taxes, right? Good. Okay, cool. So that's like the simplified version. So the way my teacher told me when I first started learning gcecon, okay. Well, fipolicy is like fizzy g and t. Fizzy gin and tonic is an alcoholic train inkers, you might know, fizzy and t, fiscal g and t, government spending and taxation. Again, busy g and t. Okay. Why is this a policy roaring? Why do we think of this as a policy? Like what is this? What is the implication of this? Do think. What is the implication? What is the implication of fiscal policy? Well, why do we care as economists? Okay. Okay. Is this just the government that it spends money on health care? And that's kind about what it has to do. But why do we care, for example, for economic growth? Maybe. Does it affect the economy, fiscal policy roaring? I don't know, is it used the if it's policy is to basically. Same means to control inflation, but it has an effect on inflation for sure. But on a basic term is roory. Like if I asked, how does fiscal policy, which we satisas physignand t government spending and taxation, how does that affect the economy? And given, let me give you a clue, how does it affect agdemand. I don't don't really know, but I think I think you do. I think you do this because this is a way more simple than what you said before. Like isn't so the government spends Yeah basically what they again, tax revenue, but basically spent it has money spent and also collects tax from you and me, right? Like when you go to the shop, you're spending money and you're paying vat rate value added tax, which you've probably heard of this tax rate. Yeah Yeah so everything you pay for like I'm pay for Yeah you pay for a bottle of water for one pound you're paying I think in the uk it's 19% vat right now around 20%. So that money and then need about 20% doesn't go to the producer what the producer collects it but then has to give it to the government. Okay. So the why do we care about that? Tax is in, you pay more tax or less tax at the shop or through your income, so your parents rmight make x amount of money, and then tax goes up, income tax or goes down, and your parents have more or less money to spend, right? If they have a business and they don't rely on income than our employees, the same thing, they might have to pay more corporate corporate income tax or corporation tax or profits or less on profit. So the tax on profit can go up and down. So whether you're a businessman or woman or an employee, the amount of disposable income you have changes based on tax on your income or profits. Okay. Do you see what I'm trying to get at? So tax can alter our disposable income, Rory, rate because I make x, but if suddenly vat goes up and I get tax more on my income, effectively I can get fewer things right? Yeah, Yeah okay. And so if you but you have your income you can't get as much stuff because you have you you have to pay more v 80 for example at the shop so you can get a few wer a bottles of water if that's the good you you'll want to buy it, right? Okay. Same thing with government spending. It also has an effect on the economy. What do you think is the effect of government spending on the economy? Give it a splease. The common bending, which you've probably heard of as g, right? Yeah where have you seen g in macroeconomics? Where we sing g. In my in microeconomy mac, but it's government spending, right? Right? But where have we seen g? So government spending here is G. G is just the symbol, like the lesright, but you've seen g before many times, not the common spending, government spending, but representatives A G, like have you see this in a formula or somewhere else? There's one formula I've seen. Yeah and is it actually, I don't remember. Why is that? But there's one formula involved. G okay, which formula can you describe it? At least if it doesn't matter if you don't remember, it's okay. But you describe what kind of formula government spending minus something equals. It's just a very complicated, it's a very, very long formula. Okay. Do you know the agg demand equation? No, you haven't done this before. No, I have done it, but I just forgot. Probably. Okay. So era demand, okay, is equal to c plus I plus g plus x minus m, okay. Okay. So ad equals super suplus, Super Six minus F G is the g we just spoke about, right? Government spending, okay. So can you then now tell me, Rory, what this g represenwhat, what is the effect of g on our go to mark the potential effect. Actual effects, the potential effect. So g is in the formula, right? Unquestionably, right? You can see the gene there. Hence we have to think about, like if you ask me the question, I think, okay, what is ad? Okay, first of all, then what if g goes up rait's to 80, right? So what is it? If the g goes up the 80 doso. So okay. Can you give me some intuition behind that? So it's correct mathematically it's correct, right, because it's an equation. But do you have any intuition for that? No intuation intuition that. Do you have any idea as to why this might be the case? So if g goes up, ad goes up, what does that mean in words? I mean, government spending goes up. The the demand goes up as well. The irgregate demand goes up as well. Why? I don't know. I don't know. The okay, so if the government starts spending more money, okay, it can maybe build a road, right it spends is more money because it's a on road to build a road it needs workers right? So this is pretty much it, I mean the government spends money, someone is making the money right? It's not burning money it's giving the money to business or just a person or someone okay so these people now have more income, right? So the government spends money and it hires a thousand workers to build this road. These a thousand workers get paid every month, okay? So this increases average demand. It increasdemand there's more income, okay? Then there's like a multiplier effect, which you've probably heard of, a multiply effect as well, but that's separate, right? So if I get employed, I can then spend my money somewhere else. And this is like a domino effect, but that's okay. So g can stimulate aggregate demand. Do you agree, warrior? Yeah. Yeah g goes up, ad goes up, okay? And ad is basically like GDP, right? What is GDP? There's different ways of arriving to ardemand. Arab demand is equal to GDP. So if government spending goes up, GDP goes up, okay? So the government spending goes up ad, and GDP, same thing, interchangeable. They both go ill up a cable ory, Yeah, right. Why doesn't GDP, sorry, what GDP, why doesn't government spending go up to the sky? Like, why doesn't the, why doesn't the government spend a lot of money? Like if it, surely if it increases GDP in the, why don't they spend a lot of money? Like a lot and a lot. Well, why not. Because. Notice there are a lot of money being spent. That's why the GDP, that's why the GDP increases now. But it's a complicated topic. So like I think, Yeah, we should we should go back to the explanation of personal policy and monetary policy and you know, you know, like, but perori, but if t goes up, right? Government spends money, our demand GDP go up. We said this, right? So what? My question is different. My question is, why doesn't the government increase spending a lot? Why doesn't the government increase government spending to the sky? Why there's other things to consider like taxtaxation, I'm sorry. It's also on depends on taxation. If there's not enough tax, if there's not enough tax to so then they can't spend. They can't increase the expenditure and they can't spend. They have to government has to save money as well. So they can't spend all the money. Depends on a lot of things, right? Right. No, 100% very good. I mean, it's kind of like about, if you ask me to rule it, why don't I spend a lot of money? I get pleasure from spending money. Like we all, if we get, if money was limitless, we would all spend a lot of it. We'll spend more at least than our current situation. We had limitless money. But the question is, the issue is we don't have limitless money, right? So our income is limited. The same thing for the government, right? The government's income is basically tax revenue, right? So they can't just spend. Governments spend a lot. So the g concodramatically, unless taxation is not following this movement again, obviously you can spend more than you tax. Again, in theory, e and most western countries do. How is this the case, Rory? Because you love that again. So you can borrow, right? Okay, why can't you borrow a lot? Like surely if you can borrow you can just spend a lot, right? What do you think? Yeah when you complaback okay, so you have to pay back plus some interest, right? Sometimes the interest rate is low, sometimes it's high. Now it's quite high relative to pre Covid or during the first part of Covid ring. For a long time governments could fund themselves, but basically an interest rate of very close to zero to a negligible ring. They just have to pay back the money, so they don't have to pay any back in the interest. So that was quite attractive, right? I mean, for anyone that wants to borrow, anyone that has a mortgage on a house or just borrows, if the interest rate is zero, you might as well borrow a lot. I mean, if you really think you can pay it back, you're basically get your free money and then you can use the money to do something else to make money, right? And you're not paying a cost. There's no cost for borrowing if they interest rate a zero percent right, or pretty much Cloto or negligible, right? So that's great. So g should, in theory, is this sible, great, fragrant demand can go up. The government wants to spend a lot of money, but it has its limits, especially because it's bounded by tax revenue, as uquite Raley said. Or okay, what is another negative consequence of g going up? So you mentioned, okay, debt, if g goes up a lot, you know, you can have to pay. Interesting, don't have to pick back. It's also a limited conscious increase of forever. But is there another consequence, a negative consequence of g going up a lot, Rory? Not. Think. Of the macro objectives. Is there a conflict with any of the other macro objectives if g goes up a lot? Maybe. If g goes up a lot. Would it there be. I can only think of 11 consequence 80 is also represented on the diagram, right? So we can represent ad and the equation, right? On a diagram, right? Close this agurate demand. You can call this surprise level. Okay? Wow, you've seen this diagram before, right? Yeah, we can call this. What do we call the x axis? The apps access the price level and quantity. Yeah. So in micro we would say plto c on the x axis. In macro we say output or why we can put over as White big wise output. It's not no counter intuitively, but it's the same thing. Output or White income, basically, that's kind of that's the intuition, okay? Agdemand is just a downward sloping demand. I mean, agdemand is demand ded like in a normal micro microeconomic ics dire, it's the same thing, right? It's just a macro we put an a on in front of it, right? Aggdemand because it represents all markets, okay? But it's the same downward sloping line with output instead of quantity and price level instead of price, but it's the same concept, right? So if ad increases, let's say because g went up, so g goes up, ad goes up, okay, do you see this, right? Ad shifts out. Okay, let's call this ad one. Okay? And let's just say at this is aggrisupply and this stays constant. Okay. Is there any change you can see here that we haven't spoken about? Aggregate demand ds aggregate demand goes up, price level increases and output increases as well. You mentioned to yourself say which macro objective changes or is altered. You set it yourself. In the answer. To to increase output Yeah to increase output. The other one mentioned the other one price level increases Yeah. So which macro objective is that? Personal policy it's price level going up is basically inflation rate Yeah so first policy right? So this is a bit it seems it's well it is very easy price levels inflation kind of most people would think of that but price level what price level is under y axis Rory is basically not so much a percent to just but an absolute number. So the reason why it's called price level and it's not called inflation is because of the following. Okay, so we have equilibrium e here. Okay. And E1, do you see this? You can see it right all down. Okay, so ad shifted out. We go from e to E1. Okay. Let's say the price level is 102 now. Okay, Yeah. Press level and numbers, absolute terms. It's not a percentage. It's not like inflation, inflation percentage concepts. So what is inflation then? Rory here. Fly chain hair. Increased okay. By how much well, how much is infallation now because of this? Inflation now is. And and up 10% wide. Because you said it increased by 10%. No, no, no. So the price level is 100 originally. E, okay, you see this right? It's number 108 now the price levels has gone up to 102 because we've gone from e to e. That's sorry, 2%, 2%, two. Yeah inflation. 2% inflation. And this is a bit, I think it's not tavery well, and at least when I was doing it was very good actually at school, but interesti struggled with like what is we all kind of get price levels equal to inflation. Well, it's something to do with inflation, right? As with price, price going up or down. But what's the exact relationship? It's a very simple ring. Inflation equals percentage change in price level, okay? So not the words inflation equals, okay, new price level minus. Well, we can just call it older here, new minus saldivided by old. This is like the standard percentage change formula, right? Do you see that? Yeah, Yeah, that's inflation. So it's basically what is it? It's very simple. Just 100. 102 okay new minus old 100. Divided by 100. Okay, Yeah. So that's the relation between price level on the y axis of any ad diagram of any ads as diagram like this and inflation. You never have inflation on the y axis, okay. You can calculate inflation from derived. You derive it from the price level on the diagram on the y axis. So you never show, you can never directly see inflation on the diagram if that makes sense, you have to calculate it off the diagram, right? Okay. Why is inflation good or bad? Like why is it even bad? Do you have any ideas there? Where do we care? Thinking about. Because. If too much, the price level would increase. More that means like people can't afford anymore, it's it's ink, it's not proportionate to the wage growth, okay? Find anything else. I think of anything else, what if I told you my income goes up in line with inflation? I signed a contract where my income goes up in line with inflation, so I'm protected again. Is that does that mean inflation is not bad anymore? Or is there any other reason why it might be bad? Sorry, I can't think of any. Okay, his inflation was 50% a year or 1000% a year again. So a tremendous amount of inflation. Would you, your parents think like would they try to do? Maybe I told you, royal, wherever your parents have them, savings or will you have your savings worry? What do you do? What you do? Anything of this? A thousand percent inflation that's in that that means we can't afford them. We can't afford anything anymore. Would you do anything? Would your parents take any action? Moved? Leave the country? Why? Okay. Why? Which are can't thought of it anymore. So we're leaving. But let's say one thing is a force indication. Maybe let's say you're okay, you made the assumption, and this is an assumption, right, that wages don't go up in line with inflation. There's a lot of inflation. Wages will tend to go up again, maybe they're not completely in line, but in theory this affects everyone. So you can't have everyone suddenly not being able to Ford anything, right? So so wages can go up in line with inflation, okay, or somewhat in line. So this takes time, not all the time, okay? It's not like one for one movement, okay? But if you use it, might you might want to leave again that I'm trying to pinpoint y. So in terms of savings, so forget about your wages, the income, think about savings, what your you already saved in your bank account, right? Why might certain people want to leave or do something with their savings if there's a lot of inflation? Of the money is setting is worth it's not worth anymore. It's not right. You have a million pounds which is a lot of money in the uk. I mean, it's a good amount of money, right? In terms of savings Yeah for a million pounds lying around pretty good, right? You can buy a decent one in London. You can't buy much with anything but a million pounds. Buy you something, right? By some kind of a flat g, even a house depends on the area. Right now there's suddenly this a thousand percent inflation rule ory, a thousand percent inflation rule rate means your million pounds is worth ten times less next year rate. Yeah. So it's worth basically 100k in a year's time. Do you see what I'm doing here? Yeah. So what might you might you want to do if you know this before? So you know, inflation will go to a thousand percent. I have a million pounds saved in my bank account. What might I want to do? What you think growing ory? I think. You can predict the movement, but do you want to do. I don't want the inflation to get that high though, but you can't control that. That's like a big thing that it can't be controlled by anyit's. Almost like let's think of it. It's it's almost like it's got a like force. It will happen. Okay? It's a macro concept. It's not just a micro thing, you or the market, it's the whole economy. Again, a lot of inflation, a thousand percent of flwhat can you do and you predict this and you think it will happen. What can you do as a regular person with that million pounds? Give me some soce. The regular person I would spmoney as much as money as possible to get to, Oh, to buy more houses because house are worth the money. Houses worth the money. Yeah. I mean, that's not a bad solution to spend it today, all of it, right? You might as well get something out of it, right? Is in c four, prices go up. A million pound home now, which you can buy, is now worth, will now be worth 10 million in a year's time. So you might as well like buy the house, right, and let it go up, even if it's just inflation. So at least you have the house. I mean, that's very good point. Very good point. And certainly, look, in countries with high inflation, rural people spend everything. There's no point keeping savings, right? Yeah, that's there's no point because your savings are losing what we call purchasing power. Again, what else can you do think of China? Maybe this helps kind of think isn't there's an implicit thing here. So imagine there's a lot of inflation, certainly in China, and imagine there are no capital controls. You're able to move your money in and out. What would a lot of people do? They will move. They will move the money to overseas 100%, right? Why? Because they can spend, they can invest in houses overseas because right now, China's market, a housing market is not ideal. Even if the independent of the housing market, your million or 10 million yuan, whatever it is, you want to protect it. You want to protect it. It's not the protectors. Not going to take it from euro rapper. Inflation is basically a thiokay. Inflation is robbing everyone. Okay, robs everyone. It's an impossible to stop force. Again, if you hold that money and you don't do anything and you have it under your mattress, inflation will steal or take from it all the time. Yeah. So you want to move it overseas, as you say, come to spend and just buy something overseas or just spend it in China as well as you don't have to move it around. So you have an asset that goes up that can go up in line with inflation, right? But also you want to send it overseas because in dollars you assume in dollars the dollars moved by the inflation in America and America letter inflation is just 2%. Okay? So you're cool putting an into dollars. So you know that yuan by the way, inflation now we're kind of going into currency, okay? And people would say inflation, it's got nothing to do with the currencies. But if you have yuan, you're you're basically invested. You care about Chinese inflation again, so nothing to do with it yuan, but if you think there's a logo, will be a lot of inflation in China. Basically you by holding you an you have a currency that can't come buy as much domestically. Another thing, if there's a lot of inflation, Rory, the yuan will also depreciate, but that's another thing. Okay, so let's just think of this before it even happens. If you can predict like a magician, right, that there will be a lot of inflation, you don't want not be holding yuan, because that one yuan you hold can buy fewer things. Again, you na cended it to the American, to dollars, and there it preserves value, and at least there won't be as much in flesh, right? Do you see that one? It Yeah. Okay, cool. Good. In China there are capital controls. Okay. So this is not so easy. This is one of the reasons why China has capital controls because what would you think? Where is certain governments help people just moving money in and out very quickly. We're money moving in our more sorry sorry also pressure shing Yeah. So China, so in theory your quite right luinflation will creinflation people would move that money out of the country, whether that's China or the us doesn't MaaS up right? In China there are capital controls, okay? It's not so easy to move money out, okay? Why do you think so? Because the government set limits that you can only transfer this amount of money outside China is not it's not free, transferable because and China doesn't want its money to go overseas, right? Most say like money is like whit's leaving. Yeah, but it's not really like in economic statnot. The main issue, the main issues, big movements of money out of a country can cause instability, right? Can cause a lot of volatility where there's a lot of people sending their money from China, what, converting into Hong Kong dollars or sending into the us, effectively, there's a lot of selling of the yuan, right? Therebe a lot of selling of the uright. If people are moving their money out, Yeah, there's a lot of people selling yuan. Yeah. This means that yuan goes down at value, right? It depreciates. There's a lot supply of yuan people selling you an on the market, supply goes up, right? So it's is demand supply you an okay. If there's only a lot of supply of un we call, let's cause like the value of the un, okay, almost the value of the yuan goes down red. Do you see this? Yeah because there's lot supply that's off selling with the right. So clearly, inflation can be bad as we says, and can cause its stability. And then trying to think, well, it's just an interesting point. It's nothing much to do with a main point, but inflation can cause a lot of instability, right? Well, so we want to control inflation, inflation. So going back to fiscal policy rule, aring fiscal policy is physig and t again. Okay comments spending ding and saation. Government spending increases agdemand taxation. What's the relationship between taxation and aggate demand roory taxation, aggregate demand when tax goes好。The aggregate demand goes down. Just why? Because you don't have because when you spend a lot of money on tax you want have the aggregate demand wouldn't be as much because people would not have enough money in their hand. Exactly. So if if the tax rate goes up, our demand goes down. Okay, it depends on the tax, but this is the case with everything with little taxes. Okay? If suddenly if my income pretax income, let's say 100k pretax. Those tax at 70k, let's say, okay, this is a decent salary. It's a good salary ring. I mean, London, I mean, it's crazy building under k, still good salary, right? So now get to spend 70k after tax. Okay? So this is ptax and this is post taxiking. Now all of a sudden I only get 65k to spend decay because tax has gone up. Okay? Income tax. Yeah, Yeah, clearly I can't spend as much. So which part of the agridemand equation would go down? Which qualified at the moment. And if we go down what's lesser in the equation. X mini. No, no, no. What's x minus ten? What does that represent? What does x represent? Imports, our export, right? But it's got nothing to do with that, right? Think of sedisciples g. So g we said again, if we're talked about g, it's either seep or I. What is affected by this decrease in mindset of disposable income from 70 to 65? And what? One you have is find, I actually don't know this concept, rwell, and the point is easy, Rory. It's just if tax goes up, I get I can spend less. Consumption goes down, right? Yeah. But do you see this, Roy? I now have 65 instead of 70. I can consume less. C, big c, consumption goes down. Do you see that? Yeah, I do. I encouraused to toilfor go for, go for. Yeah, so this one, okay, so we have to stop here, Lori. But basically, I really suggest you review fiscal policy and I try to write it ahead. Stearound, okay. So this is quite simple, that these concepts are very complicated, complicated. I mean, I mean, I think it's quite basic in a level, but I think, Roy, think about government spending as the most simple one out of government spending and tax agenso, government spending has an effect on g, again, has a direct effect on g again, taxation has a direct effect on c, which we just talked about in I again, if suddenly there's more tax on profits on businesses, right, investment would go down as well, right? Then there's indirect effects, again, as often than spending as indirect effects. Taxation is indirect effects as well. Again, of course, this is a, okay, c plus, I plus, c plus, x minus. So think about a fiscal policy and it's a fair on algorithm and that's the most important thing. Okay? And for next time, rappreciate, you've got things to do, okay? And I think this is like normal, okay? I'm just saying, I think next time and for future lessons, itbe, really good for me, Rory, if you could switch your camera on just so we can go interact with that, because I feel maybe there's a complex purpose. I'm not judging if they're complex or not, okay? I'm just saying I feel sometimes I don't know if you're distracted by something else or something. I just want you to be here just for the hour and then you can do something else where just be good for that hour. You'll here and we can have a good discussion about econking. Is that okay? So Yeah, okay. So I just want you to be here and you can switch your camera. That would really help me just to kind of interact better, just to see, because I think a lot of the time, if you don't understand something, your facial expression, the stuis facial expression gives it away and that's much, just much better, okay? In that route, that just makes my life a lot easier and I think makes it more efficient more Yeah, we okay. So see you on Sunday. I believe that's the next lesson. Rand. See you on Sunday here. Roory, okay. Yeah. Okay. Thanks for that. Thank you.