Economics: Macroeconomic Goals and Business Cycle

This document provides an overview of macroeconomic goals in economics, including non-inflationary growth, full employment, stability in price, equitable distribution of income, and equilibrium in BoP. It also explains the concept of the business cycle and its impact on the economy.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

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Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................4
Answer 3....................................................................................................................................4
Answer 4....................................................................................................................................5
Answer 5....................................................................................................................................7
Answer 5....................................................................................................................................8
Reference list............................................................................................................................10

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Answer 1
Macroeconomics is that branch of economics which is concerned with various market
systems that is known to operate on a huge scale.
The five macroeconomic goals are:
1. Non-inflationary growth
Non-inflationary growth is known as the growth of economic activity without inflation in
the economy. The non-inflationary growth is the sustainable economic development and
growth which is “real” over the long term
2. Full employment
Full employment takes place when the whole labour force is known to be fully employed
in kind of productive work. When the rate of unemployment is low, productivity in the
economy will be very high.
3. Stability in price
The main objective of the economy is keeping the rate of inflation low in order to
maintain stability in price. Since, inflation will decrease the power of purchasing of the
consumers.
4. Equitable distribution of income.
It is the duty of nation to narrow the gap between the lower income groups and higher
income groups in order to make sure that all people are equal in terms of living standards
(Nakamura and Steinsson 2018). Fair distribution of income can be achieved with the help of
taxation
5. Equilibrium in BoP

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There should be equilibrium in the balance of payments which means the exports and
imports of the country should be equal.
Answer 2
Figure 1 Circular flow of income
(Source: Cardoso 2018.)
The circular flow of income is the economic model in which the exchanges are
represented as money flows, services and goods (Cardoso 2018). The above diagram shows
the flow of money income in the four sector open economy.
Answer 3
The approaches which is used to measure the social welfare are by using gross
domestic product, Genuine Progress Indicator and by Index of Sustainable Economic
Welfare.
In this the Genuine Progress Indicator will be discussed. The GPI is used for
measuring the economic growth of the country. It have been suggested for replacing GDP. It

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is also known to net the result of the positive as well as negative growth for examining
whether it has benefitted everyone (Johnson 2017). The Genuine Progress Indicator had been
developed out of the theories of green economics. The GPI is known to take into account the
wellbeing of the nation. It also separates the concept of societal progress from the economic
growth. Both GDP and GPI uses the similar consumption data.
The Genuine Progress Indicator is different from Gross Domestic Product. The GPI
takes into account everything which is used by the GDP but also adds other figures which
represent the cost negative effects which is related to the economic activity. The negative
effects include cost of ozone depletion, depletion of resource and cost of crime. The spending
of infrastructure is viewed by GPI as positive since it provides a long lasting benefit. Another
difference between GDP and GPI is that GDP does not count work which have no cost but
GPI does.
Answer 4
The rise and fall in the production output of goods and services of an economy is termed as
business cycle. It is generally measured by using the increase and decrease of real GDP. The
business cycles are the fluctuations in the economic activity which the economy experiences
over a period of time.

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Figure 2 Business cycle
(Source: Johnson 2017)
The business cycle mainly takes place due to variations in demand and supply, expectations
about the future and also on the availability of capital. It can also be stated as an economic
sequence which is characterized by recovery, recession, growth and decline. The business
cycle relates to the economic growth volatility. It also considers the various periods through
which the economy goes through like boom and bust. The factors which affects the economic
cycle are rate on interest, multiplier effect and the credit cycle. The economic growth takes
place when real output rises, boom takes place economic growth tends to be inflationary in
nature. Economic downturn takes place when the rate of growth declines and recession means
negative economic growth.

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Price level
Real GDP
AD
1
A
D2
Answer 5
Figure 3 Aggregate demand
(Source: Nakamura and Steinsson 2018)
AD = C + I + G + (X-M)
The components of aggregate demand are consumption, investment, spending by the
government and net exports.
1. Consumption: Consumption is generally made by households and also accounts for a
large portion of aggregate demand. When consumption increases, it shifts thee curve
of aggregate demand to the right. The factors that affects consumption are rates of
interest, consumer confidence, wealth and debt of consumers.
2. Investment: Investment is the spending by firms on capital and is also a volatile
component of aggregate demand. When investment increases, the AD curve shifts to
the right. The rate of interest, business confidence, national income and the

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investment policy is known to affect the investment. There are two types of
investment which are autonomous and induced.
3. Spending of the government: the government spending is also considered as a part of
total aggregate demand. The increase in the spending of government will be shifting
the demand to right. The governments spends in order to increase the health service
consumption, education and on the re distribution of income (Baumol and Blinder
2015). The level of expenditure made by the government known to be determined by
the various government policies.
4. Net exports: the net exports is known to be the difference between the goods which is
exported and imported. When foreign goods are bough domestically, it is termed as
imports and the domestic goods which are sold abroad are termed as exports.
Sometimes rate of exchange and trade policy affects the net exports.
Answer 5
Figure 4 Aggregate expenditure
(Source: Nakamura and Steinsson 2018)

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The economy is known to be at equilibrium when the aggregate expenditure will be
equal to the aggregate supply in the economy (Uribe and Schmitt-Grohé 2017). The economy
is not always in the constant rate of equilibrium. The aggregate expenditure is the current
value of all the finished goods and services of the country which is also the sum of all the
expenditures that is undertaken in the economy by the factors during a specific time period.

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Reference list
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cardoso, J.L., 2018. The circular economy: historical grounds. Changing Societies: Legacies
and Challenges. Vol. iii. The Diverse Worlds of Sustainability, pp.115-127.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Macroeconomics in
context. Routledge.
Johnson, H.G., 2017. Macroeconomics and monetary theory. Routledge.
Murray, A., Skene, K. and Haynes, K., 2017. The circular economy: An interdisciplinary
exploration of the concept and application in a global context. Journal of Business Ethics,
140(3), pp.369-380.
Nakamura, E. and Steinsson, J., 2018. Identification in macroeconomics. Journal of
Economic Perspectives, 32(3), pp.59-86.
Uribe, M. and Schmitt-Grohé, S., 2017. Open economy macroeconomics. Princeton
University Press.