Macroeconomics Analysis Assignment

Running Head: Macroeconomics
Macroeconomics Analysis
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Macroeconomics 2
Macroeconomics Analysis
Journal – U3
Part a
Effective demand and supply determines the success of every business. There is more
potential for maximizing profit when a business owner or manager knows his/her effective
demand. The first thing I would do is to determine what the consumers are willing to buy other
than what they want. What they want only gives some notional demand. Effective demand can
only be created by predicting the actual demand that consumers will actually place. It is difficult
to estimate an effective demand, but if I estimate a value closer to what my customers will
actually buy at the price am currently offering, I will only supply enough for the same. By
supplying just enough I will be reducing costs and overheads as much as possible and thus I will
maximize my profits.
Part b
Raising the firms’ payable payroll tax to enable the government to lower the workers’
payable payroll tax has the following consequences. Tax is a major cost component for
producing firms. Firms set prices depending on the cost incurred during production, thus, if the
tax cost component is increased, we expect the price for the produced goods or services to rise as
well; this is one of the cons. One of the pros is that the workers will be relieved some of their tax
burden and will have a higher level of disposable income. A higher disposable income for the
workers means that there will be an increased aggregate demand, and due to the inability of firms
to produce sufficient supply given the cost constraint, there will be a shortage which in turn will
lead to higher prices. In this case there will be no benefit for the workers since all the extra
income will be consumed by purchasing the same level of goods and services. This
government’s policy is inflationary and should not be implemented.
Journal – U4
Part a
The economic agents are the major parties that businesses and households depend on to
determine the economic level on the national economy. When these agents lose their confidence,
it means that the economy is not doing well and a need for an action. This causes the consumers
to spend less as they are uncertain of the direction the economy is taking. They save more for the
unknown probable circumstances. The opposite is true, a rise in the confidence of economic

Macroeconomics 3
agents stimulates the spending level as consumers don’t mind their spending when the economy
is on a good outlook. The factors responsible for increase in consumer spending and investment
would be; lower interest rates, high economic growth, high level of loans availability, lower
inflation, expansionary government policy such as lower taxes, high expected return, higher level
of savings, etc. The confidence of consumers and investor does not affect my spending pattern
because it doesn’t have a direct impact on the price level.
Part b
GDP is the best way to determine the performance of an economy. Ignoring the transfer
payments in its computation does not make it less informative as they do not absorb any
resources. Transfer payments do not also lead to production of output and thus do not fit in the
computation of GDP which is the monetary value of every good and service produced for a given
period of usually one year within the borders of a country. The value of used goods cannot also
be included in this measure as the depreciation value of this asset has already been taken into
account. Since its original value was considered in the computation of GDP for the year it was
produced, its inclusion again would bring the problem of double accounting. The other factor
excluded in the estimation of GDP is the Net Foreign Factor Income which is the difference
between income earned from abroad by firms and citizens and the income paid to foreigners.
This exclusion has a significant impact on economic welfare because the country may be
performing well but a greater proportion of income is absorbed by the foreigners.
Journal – U5
Part a
Macroeconomic indicators are very useful in business. There are certain indicators that
are useful to every business. In planning for the business, the predictions on these indicators is
very essential. For instance, if the inflation rate is projected to rise, it means consumers’ income
will be high and thus demand will increase; price for raw materials will also rise. Thus, I will
secure enough stock to supply during this period; I’ll also order more raw materials to avoid the
increased prices which will interpret to higher costs of production. Interest rate helps in
determining the cost of capital for the business. Higher interest rate means that the cost of
servicing debt is very high and thus a need to source capital by other means other than loan from
monetary institutions. The indicators are relevant for decision making for the business because

Macroeconomics 4
they have direct impacts that are easily deduced. Using macroeconomics indicators for business
planning leads to improved profits since the plan is according to the economic movements.
Part b
In my opinion, the official unemployment rate is not an actual representation of the
unemployment rate on an economy. The reason given is based on various set requirements that
one has to meet to be considered unemployed. One, this person should be having no job during
the said period, one could be doing a job which could be paying too little or a charity job just to
avoid being idle. This is also in line with the issue of underemployment where a person working
for say two hours is considered to be employment. At the current economic situation, those hours
are not enough for one to be self-sufficient. These people are still looking for jobs. The other
conditional requirement is that the person should be actively seeking to be employed; there are
many people who are not employed and are not actively seeking for employment but if offered
an opportunity they would grab it. This is the issue of discouraged workers; these people may
have actively looked for a job for long without success and have lost hopes of getting one.
Therefore, if the unemployment rate doesn’t include the underemployed and the discouraged
workers in its estimation, it can be concluded that it doesn’t reflect a true situation of an
economy.
Journal – U6
Part a
In my opinion, I would rather live in an economy with low level of GDP but a high level
of growth rate other than vice versa. A high level of GDP does not necessarily mean that there is
a high standard of living in that economy. When there is a high level of growth rate, it means that
macroeconomic indicators are doing very well. There is a higher growth of income when there is
a high rate of growth. High level of GDP only shows how much the economy has achieved. With
a high growth rate, it is easy to tell that there is creation of many jobs and thus the probability of
getting a job is higher. Due to high income growth, the standard of living for the citizens is
greatly enhanced. Increased growth rate has been noted to offer a greater contribution to poverty
reduction given the fact that it raises tax revenue which facilitates additional government
spending.

Macroeconomics 5
Part b
When investing on human capital, the government incurs the opportunity cost of
spending on other public goods and services; this creates a need for the government to make
appropriate choices gauging the importance of each sector it spends on. The opportunity cost for
the economy is thus the lost earnings. Human capital investment is essential for any given
economy as it raises productivity. A country can invest heavily on the education sector but
overinvestment is not possible given that an economy also faces budget constraints. Besides
human capital, the government needs a budget allocation on the accumulation of physical capital.
Attending college has an opportunity cost of losing earnings since one can use the funds meant to
school fees to start a business that may generate some income. Failure to attend college one
misses the opportunity of getting a good well-paying job and one remains to be less productive.
Journal – U7
Part a
Increase in the supply of money causes an increase in the money in the circulation thus
raising the demand for goods and services. Most consumers have funds to place demands when
there is a high level in the circulation; this is a direct impact on the increment in consumer
spending. The increased demand by consumers creates a need to increase supply, furthermore a
high demand causes the price to rise making it more attractive for businesses to supply more;
investment level is stimulation in this case. The increase in money supply causes the firm I work
for to produce more with anticipation that demand is going to move up. The firm also purchase
more raw materials since the expansionary policy is inflationary and the raw material prices will
also rise. Federal Reserve policies makes us individual to have greater or lesser disposable
income and in turn we make the choice on our affordable demand levels.
Part b
The costs of inflation are directly felt by the consumers. The consumers are not able to
afford the initial goods and services given that their income remain constant; this is a loss on the
purchasing power. Businesses suffer menu cost since changing prices may involve various costs.
Consumers hold less money and thus have to spend more time going to the bank, these are the
shoe leather costs. The other cost is wealth redistribution from creditors to debtors; consumers
are forced to borrow more to facilitate their spending. There is also the cost of a shortage in
hoarded goods since consumers buy more durable goods. The redistribution of wealth is

Macroeconomics 6
important for the U.S. economy because increased lending worsens the situation.my leather costs
are that the money I have at hand has less value and thus I need to makes trips to the bank for
more; the costs of withdrawal from banks is also a factor. The costs may be measure in dollars
for example the number of withdrawals I made during the inflation period, and the extra amount
of money I spend to purchase the same bundle of goods and service I used to purchase earlier.
My shoe leather costs differ with that of the university president because his income is higher
than mine and we are purchasing the same products. The money he may consider little to hold
maybe equal to that I make several trips for.
Journal – U8
Part a
This is a wrong idea as you may end up making a loss. Since nominal interest rate equal
to real interest rate plus expected inflation, it’s always assumed that different countries have
different inflation expectations and that the real interest rate is matched if purchasing power
parity holds. The currency of the nation high nominal interest rate is expected to change by the
percentage of interest rate differential. The pro is that you will make profit, but the con is that
when you come to repay the loan, the interest rate will exceed the one made abroad. Thus it’s not
a good idea
Part b
President Roosevelt was trying to increase the Aggregate demand but this could not be
successful.
Fig: long run equilibrium
LRAS
Price AS1
AS0
C B
AD1
A
AD
Output

Macroeconomics 7
The economy was at point A where equilibrium is given by intersection of AD0 and AS0.
Roosevelt’s action caused aggregate demand to rise to AD1 and the new equilibrium was at point
B; both output and price are increased. However, the perception of people changes, their wages
and the price resulting in Short run aggregate supply curve AS0 shifting to AS1 back to the Long
Run Aggregate Supply (LRAS) at point C.
Journal – U9
Part a
A wave of pessimism have a negative impacts to the consumers’ confidence and thus if
nothing is done they will cut their spending causing the aggregate demand to fall. The Federal
Reserve can stabilize aggregate demand by increasing money supply, otherwise, fiscal policy of
lowering tax should be implemented. When aggregate demand falls, the economy is affected
because unemployment rises due to reduced level of production.
Part b
During a recession the government should not use the balanced budget, instead it should spend
more or lower taxes to boost economic growth. It should not follow the balanced-budget rule
during a recession as this would make the recession more severe because it can’t spend beyond
the tax revenue it raises, but this is when an extra spending in needed.
Journal – U10
Part a
Monetary and fiscal policies directly influence my level of spending and level of
production for businesses. It is difficult for policy makers in choosing the strength of
implementing both fiscal and monetary policies because of the vagueness of how many
consumers will change their demand patterns. It is difficult to determine the amount of money
supply or level of tax that will stimulate some change, thus government spending remains the
most effective policy for the long run. The government will easily determine the most important
sectors in the economy and increase spending on such sectors.
Part b
I argue on maintaining the income tax, this is because tracking of income is easier than
tracking consumption. We may be consuming the same goods but with different incomes; that
would be unfair to the low income earners; this is the con of expenditure tax. The pro of

Macroeconomics 8
expenditure tax is that it would raise income but expenditure would fall since consumers would
become more sensible on spending to avoid the tax. I would prefer income tax as it redistributes
wealth; this is the pro of income tax