Assignment on Business Economics in PDF

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Author Note

1BUSINESS ECONOMICS
Table of Contents
Answer to question 1.......................................................................................................................3
Answer to question 2a.....................................................................................................................3
Answer to question 2b.....................................................................................................................3
Answer to question 2c.....................................................................................................................3
Answer to question 2d.....................................................................................................................4
Answer to question 2e.....................................................................................................................4
Answer to question 3a.....................................................................................................................4
Answer to question 3b.....................................................................................................................5
Answer to question 3c.....................................................................................................................5
Answer to question 4.......................................................................................................................6
Answer to question 5a.....................................................................................................................7
Answer to question 5b.....................................................................................................................7
Answer to question 5c.....................................................................................................................7
Answer to question 5d.....................................................................................................................7
Answer to question 5e.....................................................................................................................8
Answer to question 6.......................................................................................................................9
Answer to question 7.....................................................................................................................10
Reference list.................................................................................................................................11

2BUSINESS ECONOMICS
Answer to question 1
The following problems a government might face during the implementation of a
balanced budget approach to its spending.
Difficult to enforce: The entire proposition of the budget does not get disclosed before the
official announcement of the budget. Therefore, the consequences of the government budget
cannot be predicted (Leduc & Liu, 2016). It can bring positive as well as negative impacts for the
economy. The allocation of the budgetary expenditure may not be approachable for the entire
population.
Aggravating recessions: Balanced budget approach might put the economy in danger condition.
This budgetary method allows the government to rise the public spending on the development
activity. Hence, the government expenditure might exceed the public revenue in shortly.
Worsen the debt burden condition: It deteriorates the government’s debt burden condition,
which in turn, lowers the economic growth (Taylor, 2014). The economy experiences a sluggish
growth rate due to a lack of credit generation.
Answer to question 2a
The number of frictional or seasonal unemployed in Eastralia is (1750 + 370) = 2120
Answer to question 2b
The number of structurally unemployed is (800 + 250 +150) = 1200
Answer to question 2c
The number of cyclically unemployed is 370.

3BUSINESS ECONOMICS
Answer to question 2d
The people in (v) fit into the cyclical unemployment.
Answer to question 2e
Considering the statement, it can be said that there exists clear difference between
frictional, structural and cyclical unemployment. Frictional unemployment occur when people
are looking for a job or people or shifting their jobs from one sector to another sector. Hence, the
sum of seasonal works of 1750 and 370 people looking for employment comes under frictional
unemployment. Structural unemployment happens when the production technology gets
modified (Fujita & Moscarini, 2017). In this case, the sum of 800 motor vehicle workers who
have been retrenched due to lower demand for motor vehicle and 250 unemployed skilled
technicians due to lack of mechanical skills along with 150 unemployed workers owing to
contraction in the export sector. The cyclical unemployment causes due to sluggish economic
growth as well as low employability of the aged workers (Horta, Meoli & Vismara, 2016). Here,
370 skilled workers who are aged over 55 years will be counted under the cyclical
unemployment.
Answer to question 3a
As per the statement, the government has been asked to design an anti – recession
stabilization policy while the public sector is experiencing sluggish growth. Fiscal policy does
not give effective outcome when the performance of the public sector gets worsened. In this
regard, expansionary monetary policy is the best effective measurement under the anti-recession
policy. The central bank lowers the interest rate as to intensify the money supply, which in
return, boosts the employment and production level of the country.

4BUSINESS ECONOMICS
Answer to question 3b
Greater income equality empowers the people with more financial strength. It reduces the
disparity in the income distribution across the population (Svensson, 2015). This allows
everyone to hold equal economic power. This results in the improvement of the per capita
income.
Answer to question 3c
High rate of economic growth is likely to enhance the structural development of the
economy. Therefore, it leads the economy to the technical advanced situation. This raises the
production as well as improves the quality of goods and services. Hence, the aggregate gets
intensified to overcome the detrimental impacts of recession.

5BUSINESS ECONOMICS
Real GDP
MS
YfY1
Inflation rate
I
I1
MS1
Answer to question 4
Figure: Effect of fall in money supply in aggregate demand and investment demand
Source: (as created by the author)
Considering the figure, real GDP is measured along with the horizontal axis and inflation
rate is labeled along with the vertical axis. The intersection of the money supply and aggregate
demand derives the equilibrium level of output ad inflation rate of the economy. Here, Yf
corresponds to the full employment level of the economy (Blanchflower et al., 2014). The
monetary authority decreases the money supply through the selling of bonds. Meanwhile, falling
money supply reduces the purchasing power as well as declines the aggregate demand along with
the invested demand. Therefore, it cuts down the inflation rate. In response to that, the
cumulative output gets declined below the full employment level.

6BUSINESS ECONOMICS
As per the economists, there exists inverse relationship between the bond rice and interest
rate. Therefore, interest rate, inflation rate and unemployment rate determine the effectiveness of
the money supply (Eriksson & Rooth, 2014). In general, inflation is controlled by increasing the
interest rate. On the other hand, improvement in the inflation rate corresponds to the reduction in
the unemployment level in the short run.
Answer to question 5a
As per the statement, the purchase of shipload of French wine by an Australian importer
will improve the supply Euros in the foreign exchange market. In this case, the Australian
importer will have to make the payment in Euro as the domestic currency of France is Euro.
Answer to question 5b
If a German motor vehicles manufacturer decides to build an assembly plant in Adelaide
demand for Euros will be surged up. The domestic currency of Adelaide is dollar, whereas, the
domestic currency in Germany is measured in terms of Euro (Cavallo, Neiman & Rigobon,
2014). Therefore, the German importer needs to spend Euro in order to operate in another
country.
Answer to question 5c
According to the statement, there will be enhancement in the supply of Euros if an
Australian student decides to spend a year studying at an Irish university. The student will have
to have to continue the expenses in Euro as it is the national currency of Ireland.

7BUSINESS ECONOMICS
Answer to question 5d
Referring to the statement, the supply of Euros will be intensified when a French
manufacturer exports machinery to Morocco on an Australian ship. The export of goods and
services allows the capital inflow into the domestic economy.
Answer to question 5e
According to the statement, the maturity of the Australian bond will provide Euros to the
Dutch Citizen. This will improve the supply of Euros in the market as Euros is the currency of
Netherlands.

8BUSINESS ECONOMICS
AS2
AS1
AD2
AD1
LRAS
Output
Price Level
P3
P2
P1
QfQ2
c
a
b
Answer to question 6
Figure: Leftward sift in the aggregate supply curve in AD – AS model
Source: (as created by the author)
The above figure measures the output along the horizontal axis and price level along the
vertical axis. The intersection point of the aggregate demand (AD) and aggregate supply (AS)
curve gives the full employment level of the economy (Qf). Suppose, the economy is operating
under the full employment level at point b. In this case, the price level is relatively greater than
the equilibrium price and output is below the equilibrium output level (Azevedo & Leshno,
2016). The economists refer this situation to the cost-push inflation which increases the
production cost above the aggregate level. This moves the short-run AS curve to leftward side
from AS1 to AS2. In response to that, the economy moves from a to b. On this account, the
government again tries to attain the full employment level of Qf by the means of expansionary
fiscal policy. This results in the improvement of the AD curve from AD1to AD2. This economic

9BUSINESS ECONOMICS
phenomenon is termed as inflationary spiral. As a result of that, economy again moves back to
the full employment level from b to c.
Answer to question 7
The current account deficit occurs when export is less than the import in the monetary
terms. It leads the economy into the trade deficit condition. Current account deficit is results in
the surplus of the capital account (Challe et al., 2017). This sort of deficit causes severe
constraints upon domestic economic policies for the following reasons.
Uncertainty in capital inflow: Foreign investors lose confidence in the presence of current
deficit in the domestic economy. A number of investors decided to restrain from further
investment due to the devaluation of the currency and exchange rate. It depreciates the monetary
return of the capital investment.
Growing involvement of foreign ownership: As the current account deficit improves the
capital account surplus, the foreign investors try to purchase more assets from the domestic
market. It transfers the ownership from the domestic companies to the foreign companies. It
lowers the long-term income of the economy.
Unbalanced economy: The current account deficit accounts for unbalanced economic situation
as short-term consumption is greater than the long-term consumption. It causes disparity in the
GDP concentration level.
Emerging concern for depreciation: The dearth of capital inflow depreciates the domestic
currency value, which in turn, intensifies the inflation situation in the domestic economy. The
growth in average expenditure surpasses the growth in the per capita income.

10BUSINESS ECONOMICS
Reference list
Azevedo, E. M., & Leshno, J. D. (2016). A supply and demand framework for two-sided
matching markets. Journal of Political Economy, 124(5), 1235-1268.
Blanchflower, D. G., Bell, D. N., Montagnoli, A., & Moro, M. (2014). The happiness trade‐off
between unemployment and inflation. Journal of Money, Credit and Banking, 46(S2),
117-141.
Cavallo, A., Neiman, B., & Rigobon, R. (2014). Currency unions, product introductions, and the
real exchange rate. The Quarterly Journal of Economics, 129(2), 529-595.
Challe, E., Matheron, J., Ragot, X., & Rubio‐Ramirez, J. F. (2017). Precautionary saving and
aggregate demand. Quantitative Economics, 8(2), 435-478.
Eriksson, S., & Rooth, D. O. (2014). Do employers use unemployment as a sorting criterion
when hiring? Evidence from a field experiment. American Economic Review, 104(3),
1014-39.
Fujita, S., & Moscarini, G. (2017). Recall and unemployment. American Economic
Review, 107(12), 3875-3916.
Horta, H., Meoli, M., & Vismara, S. (2016). Skilled unemployment and the creation of academic
spin-offs: a recession-push hypothesis. The Journal of Technology Transfer, 41(4), 798-
817.
Leduc, S., & Liu, Z. (2016). Uncertainty shocks are aggregate demand shocks. Journal of
Monetary Economics, 82, 20-35.

11BUSINESS ECONOMICS
Svensson, L. E. (2015). The possible unemployment cost of average inflation below a credible
target. American Economic Journal: Macroeconomics, 7(1), 258-96.
Taylor, J. B. (2014). The role of policy in the Great Recession and the Weak
Recovery. American Economic Review, 104(5), 61-66.