Macroeconomics: Effects of Wage Growth, Components of Economy, Unemployment Rate, and Inflation Rate

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Student ID

MACROECONOMICS1
Table of Contents
Answer to question 1..................................................................................................................2
Answer to question 2..................................................................................................................3
Answer to question 3a................................................................................................................5
Answer to question 3b................................................................................................................7
References..................................................................................................................................8

MACROECONOMICS2
Answer to question 1
The amount an individual earns from doing job is known as the wage rate. As per
economic theory, the consumption of individuals increases with increase in their income and
thereby marginal propensity to consume increases (Friedman 2018). Therefore, increase in
wage rate increases marginal propensity to consume as it increases income. Therefore, weak
wage growth rate affects the economy in negative manner. Low or weak wage growth leads
to low rate of increase in income of the individuals and thus consumption of products fall in
and thereby demand of goods in the economy decreases. This fall in the market demand is
mainly due to the fall in consumption (Summers 2015). Owing to fall in demand, the price of
goods falls leading to lower revenue for the sellers and thereby they earn less profit. Hence,
to counter the effect of the low market demand and to recover from the situation of low
profitability the producers reduce their production. As a result, the wage rate of the workers
will fall and no employment will occur in the economy. Moreover, with fall in income of
individuals, there will further fall in demand and thereby aggregate expenditure declines. The
fall in aggregate expenditure will shift the AE curve from AE1 to AE2 as shown in figure 1
given below. The downward shift in AE and fall in demand reduces the production of the
economy and thus the output will decreases to YE2 from YE1. This will cause economic
crunch that will affect the business sector of the country. As a result, the government will
earn less revenue and thereby the whole economy will suffer from fall in income and the
equilibrium of the economy declines to yellow dot from red dot as shown in the figure below.
Therefore, due to this fall in income, the economy goes into stagnation (Coates 2015).