Macro and Micro Economics

This project report explores the concepts of macro and micro economics. It covers topics such as equilibrium level of national income, IS-LM model, monetary policy, Philips curve, and fiscal policy. The report provides explanations and calculations for various economic scenarios.

Macro and micro
economics

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
(1) Value of planned savings at the equilibrium level of national income..................................1
(2) Unplanned addition and falls if national income is £750 million..........................................1
(3)Equilibrium level of national income if planned investment rises from £120 million to £150
million..........................................................................................................................................1
QUEATION 2..................................................................................................................................2
(1) IS-LM Model..........................................................................................................................2
(2) Effect of monetary construction through IS-LM digram.......................................................2
QUESTION 3...................................................................................................................................3
(1)Contractionary open market operation in the money market..................................................4
(2) Link between narrow money supply and broad money supply..............................................4
(3).................................................................................................................................................5
QUESTION 4...................................................................................................................................5
(1) Philips curve...........................................................................................................................5
(2) Explanation of Philips curve to be hold in short run..............................................................5
QUESTION 5...................................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Economics is a social science that deals with the production, distribution and
consumption of goods and services. Through using all the theories of economics all the limited
resources are used for satisfying unlimited wants (Amjadian, Ghanbari and Khamari, 2018). It is
divided in two types one is Micro Economics that talks about the actions of an individual, firm,
household, market as single unit. On the other hand Macro Economics deals with the economy as
a whole. In this project report using economics various questions are solved.
QUESTION 1
(1) Value of planned savings at the equilibrium level of national income
Equilibrium level is when aggregate supply is equal to aggregate demand. The
equilibrium level of income is referred when an economy or business has an equal amount of
production and market demand. At equilibrium level aggregate income will be equal to sum of
consumption, investment and Government expenditure. The formula for this is defined as-
Y= C+I+G
600= 420+120+60
So, here 600 is the national level at equilibrium level that provides savings of £120. This
is concluded on the basis that at equilibrium level Investment is equal to Savings.
(2) Unplanned addition and falls if national income is £750 million
In the present case national income is £600 million where addition of consumption,
investment and government expenditures equalise with the income (Ghironi, 2018). If national
income is £750 million then it will give an unplanned additions in stock for £150 million.
(3)Equilibrium level of national income if planned investment rises from £120 million to £150
million.
Here formula of national income will be used where-
Y= C+I+G
Y= 420 + 150 + 60
Y= £630 million
Y= National income
C= Consumption
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I= Investment
G= Government expenditure
QUEATION 2
(1) IS-LM Model
In this model IS stands for “investment-savings” and LM stands for “liquidity preference-
money supply”. This model helps in reflect that how the market for economic goods interact with
the loanable funds market or money market. It shows relationship between real out put and
interest rates. In a closed economy the equilibrium condition in the market for goods is that
production is equal to the demand for goods which is sum of consumption, investment and public
spending. This shows investment-savings relationship (IS-LM Model, 2017). The LM curve
represents the relationship between liquidity and money. Both the curve will intersect when they
will satisfy the condition of equilibrium.
(2) Effect of monetary construction through IS-LM digram
In closed economy the interest rate is determined by the equilibrium of supply and
demand for money. If there is an increase in the government spending which is considered a
fiscal policy the IS curve will shift to the right. When considering the monetary policy an
increase in the money supply then the curve that will shift will be LM curve. As increase in
money supply will decrease interest rate and shift the LM curve to the right.
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QUESTION 3
(1)Contractionary open market operation in the money market
Contractionary monetary policy causes a decrease in the prices of bonds and treasury
bills and an increase in interest rate. Higher interest rates leads to lower level of capital
investments as returns from them are less attractive. The higher interest rates makes the bonds
and treasury bills more attractive option for investment. This leads to hike the demand for the
domestic bonds and bills. Contractionary monetary policy results in an increase in aggregate
demand (Hasan, 2017).
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(2) Link between narrow money supply and broad money supply
Narrow money covers the most liquid forms of money i.e. Currency. Narrow money is
the subset of broad money that includes long-term deposits and other deposits- based accounts.
The money multiplier that reflects the link between both the forms of money is an deposit
scheme that gives liquidity of a saving account coupled with attractive interest rate of 390 days
fixed deposit (Lee, 2015). This is achieved by linking saving account with fixed deposit. It is that
amount of money that banks generate with each dollar of reserves. Money multiplier is
formulated as-
m = 1+c / 1+c
m = the money multiplier
c = the public's cash deposit ratio
c = the bank's cash deposit ratio
When the size of narrow money enhances that it will number of money multiplier will be
more. On the contrary when deposits with banks will be more then it will reduce the number of
money multiplier.
(3)
M= 1+c / 1+c
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3 = 1+9 / 1+c
3+3c= 10
3c= 7
c= 7/3
c= 2.33
QUESTION 4
(1) Philips curve
Philips curve concept states the change in unemployment within an economy has a
predictable effect on price inflation. A inverse relationship is stated in unemployment and
inflation that depicted as a downward sloping concave curve. In this curve inflation is reflected
in Y-axis and unemployment is reflected on X-axis.
(2) Explanation of Philips curve to be hold in short run
Philips curve relationship can be hold in short run because for long run no variable can be
hold constant. When the unemployment is same then in order to push unemployment lower
central bank increases inflation. To make the economy grow and reduce the effect of
unemployment or higher inflation government or banks takes all the effective measures so that
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inflation and unemployment rate can be minimised. Two explanations for Philips curve
relationship hold in short run is-
 Intervention of central bank
 Effect of other variable changes on the rate of employment (Philips Curve, 2019).
QUESTION 5
Fiscal policy is the mechanism by which a country's central bank controls the national
economy supply of money to reach a minimum rate of interest. It's used to promote economic
stability and growth by stabilizing rates and growing the economy. Governments control an
economy by changing the national economy supply of money by increasing or decreasing
lending rates. Expansionary fiscal policy raises the economy's net money supply whereas the
world economy overall money output is reduced by monetary stimulus. Demand Pull Inflation
includes rising prices as actual GDP grows and dropping unemployment as when the market
shifts along Phillips Curve.
For instance, inflation increases by 3%, but production increases by only 2%.
Accordingly, businesses can see that prices will rise and will adapt by raising prices. When
companies generate more, further employees will be employed. This buying spree would cause
inflation to drop. The increased housing pressure brings upwards pressure on prices, contributing
to deflation on the wage-push. Therefore, higher salaries raise workers ' discretionary income,
resulting in increased retail expenditure. Mainly the impact of inflation based upon the steep the
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aggregate supply curve and it remain close to the full employment. The closer it will be the more
inflation will rise.
CONCLUSION
From the above project report it has been concluded that various concepts that are
developed in micro and macro economics helps in maintaining economy of the country. Using
economics concept of demand and supply is implemented to meet the equilibrium level. All the
available resources are used in the most productive manner that will help in using scare resource
in effective manner.
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REFERENCES
Books and Journals
Amjadian, E., Ghanbari, A. and Khamari, I., 2018. Investigating management plant nutrition
(organic and inorganic and blended fertilizers): on the accumulation and balance
elements macro and micro in wheat seed (Triticum aestivum L). Agroecology. 10(1).
Ghironi, F., 2018. Macro needs micro. Oxford Review of Economic Policy. 34(1-2). pp.195-218.
Hasan, Z., 2017. Consumprion and Islam: Micro Foundations and Macro Modelling. Journal of
Economic and Social Thought. 4(1). pp.108-118.
Lee, F. S., 2015. A Heterodox Micro-Macro Model of a Monetary Production Economy. Money
and Macrodynamics: Alfred Eichner and Post-Keynesian Economics: Alfred Eichner
and Post-Keynesian Economics, p.22.
Online
IS-LM Model. 2017. [Online]. Available through:
<https://policonomics.com/lp-open-economy-is-lm/>
Philips Curve. 2019. [Online]. Available through:
<https://www.economicsonline.co.uk/Global_economics/Phillips_curve.html>
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