Macroeconomics Assignment Solution for Business Economics BUECO5903

This document presents a comprehensive solution to a Business Economics assignment, specifically addressing macroeconomic principles. The assignment covers several key areas, including the distinction between intermediate and final goods and their impact on GDP calculation, and the analysis of demand-pull and cost-push inflation, including their causes and graphical representations. The solution further explores macroeconomic policies, such as the full employment objective, and contrasts classical economists' views on unemployment with structural and cyclical unemployment. It examines the effects of various economic factors such as changes in marketing skills, personal income tax, trade balance, and destruction of capital, on aggregate supply and demand, providing graphical illustrations. Additionally, the assignment analyzes the advantages and disadvantages of the Consumer Price Index (CPI) and discusses the gainers and losers during inflation. This assignment offers valuable insights into core macroeconomic concepts, providing a well-structured and detailed analysis of economic principles.

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

1BUSINESS ECONOMICS
Table of Contents
Question 2..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................2
Question c...............................................................................................................................3
Question 3..................................................................................................................................3
Question a...............................................................................................................................3
Question b..............................................................................................................................5
Question 4..................................................................................................................................6
Question a...............................................................................................................................6
Question b..............................................................................................................................7
Question c...............................................................................................................................7
Question 5..................................................................................................................................8
Question a...............................................................................................................................8
Question b..............................................................................................................................9
Question c...............................................................................................................................9
Question d............................................................................................................................10
Question 6................................................................................................................................11
Question a.............................................................................................................................11
Question b............................................................................................................................12
References................................................................................................................................13

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Question 2
Question a
Intermediate good refers to a good, which is used in the production of a finished or
final good directly used by consumers. Intermediate goods are generally not included in the
computation of GDP in order to avoid the problem of double counting (Mankiw, 2014).
i)A windscreen purchased by a supplier of motor vehicle spare parts is an intermediate goods
as it is no used by final consumers rather it is used in the production of motor vehicles which
is the finished product.
ii)The new bull dozers used by a construction company is example of a final good as it is a
ready for use item and can be directly used by the final users. However it can be treated as an
intermediate good when it is used for production of final goods or service by others.
iii) The cleaning service purchased by household is counted as a final service as the
household directly uses the service.
iv) Coking coal is generally considered as an intermediary good as it is used for the
production of steel, iron, steam and others. As it is generally not ready for of final users, it is
counted as an intermediary good.
Question b
Given that, an economy produces goods and services with a market value of $800
billion. The economy is however able to sell goods and services to the domestic and foreign
users of worth $750 billion. The GDP of the nation is $800 billion. This is because GDP of a
nation refers to the market values of all products and services that a nation produces in an
accounting year (LeRoy & Werner, 2014). Irrespective of whether all the goods and services

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are sold in the market or not, GDP includes values of all the marketed goods and services.
Therefore, GDP of the nation should be $800 billion. The unsold goods are considered as
inventories of firms, which are counted in Gross National Domestic Investment. Stock of
inventory in the economy for this year is therefore ($800 - $750) = $ 50 billion.
Question c
The new truck is considered as a final good because the truck is a new product
produced in the current year and is produced for the final users (Goodwin et al., 2015). As the
truck is a finished good and is used by the final users it is final good.
As explained above the new truck is a final good and hence, value of the truck should
be included in GDP. The calculation of GDP is through the expenditure approach. When a
company buys a truck and uses it for providing other services, it is considered as an
intermediate good for the production in subsequent periods.
Question 3
Question a
Demand-pull inflation
One common cause of inflation is increase in demand in excess of available supply.
The demand-pull inflation is found to be in existence when aggregate demand of a good or
service exceeds the aggregate supply. Demand –pull inflation starts when consumers in the
economy suddenly increases their demand (Hill, Griffiths & Lim, 2018). Sellers usually meet
the excess demand by increasing supply. However when additional supply is not available to
meet the additional demand sellers increase price of their goods. This leads to demand-pull
inflation.

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Figure 1: Demand-pull inflation
(Source: as created by Author)
Cost-push inflation
Another commonly known factor causing inflation in an economy is higher cost or
producing goods and services. In contrast to demand-pull inflation, inflation resulted from a
higher production cost is termed as cost-push inflation. If production cost increases,
producers are unavailable to continue production with current level of production. Producers
contract production because of higher cost and lower profitability (Baumol & Blinder, 2015).
Following a decline in production, overall supply in the economy falls. As aggregate supply
falls short of existing level of demand, there is an upward pressure on price level resulting in
cost-push inflation.

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Figure 2: Cost-push inflation
(Source: as created by Author)
Question b
Causes of demand-pull inflation
Economic growth
An economy realizes upward pressure on price during the phase of rapid economic
expansion. As an economy expands, national income increases. With increase in aggregate
income, people become more confident about purchase of different goods and services. This
increases spending in the economy leading to an increase in aggregate demand. As aggregate
demand increases, price level also increases.
Discretionary policy
When government taken discretionary fiscal policy by increasing government
expenditure or cutting tax rate both output and price level increases (Kakarot-Handtke, 2014).
If government increases spending or lower the tax rate, then there is an increase in aggregate

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demand because of a direct or indirect gain in income. With an increase in aggregate demand,
inflation increases.
Cause of cost-push inflation
Wage-push inflation
One common cause of increase in production cost is increase in wage of workers.
Wage can be increased because of union bargaining, minimum wage legislation, shortage of
labor and others. When wage increases, producers have to bear a higher wage cost which
inflate the overall production cost. Increase in production cost due to increases in wage of
labors and the resulted inflation is the most commonly discussed cause of cost-push inflation.
Shortage of inputs
Destruction of resources due to natural calamities lead to shortage of necessary
resources used in production (Cooter & Ulen, 2016). The shortage of resources increases
price of inputs. An increase in cost of inputs leads to an increase in cost of production. This in
turn leads to cost-push inflation.
Question 4
Question a
One primary objective of macroeconomic policy makers is to ensure a condition of
full employment. This however does not imply measured unemployment equal. Zero
unemployment is even not good for a healthy economy. In a dynamic modern economy, there
always exists some form of unemployment identified as frictional, structural or seasonal
unemployment. People always have a tendency to change their current jobs to look for a
better job (Cowen & Tabarrok, 2015). People who are unemployed for moving between jobs
are called frictional unemployed. With passes of an economy always experiences some

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technological change causing a change in structure within the industries causing some people
to remain unemployed because of skill shortage. This kind of unemployment is called
structural unemployment. These forms of unemployment that naturally exists in the economy
together form natural rate of unemployment. An economy in which unemployment rate
equals the natural rate of unemployment is said to achieve full employment (Smith, 2016).
Target of the policymakers therefore should be to achieve and maintain an unemployment
rate at its natural rate of unemployment.
Question b
Classical economists considered any form of unemployment as voluntary
unemployment. The Say’s law states that supply creates its own demand. Agreeing with the
law, classical economist stated aggregate production in the economy creates right amount of
income for the economy in order to purchase all the produced goods and service without any
layoffs. Classical economists discarded the concept of under consumption following the
assumption of flexible wage, flexible price and interest rate. Thy believed that any
misbalance between demand and supply is automatically correct because of flexible wage,
price and interest rate (Bauer, 2018). Because of self-correcting mechanism, an economy
always maintains full employment indicating any form of unemployment to be involuntary.
Question c
An economy experiences structural unemployment due to change in economic
structure overtime, change in the tastes and preferences within the economy or change in
production technology. The reasons for structural unemployment can be as follows
Firstly, workers may be jobless due to lack of education or skills needed for the available
jobs. Secondly, preference of consumers may shift towards imported goods. Thirdly, change
in technology of production is another factor responsible for structural unemployment.

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Cyclical unemployment in contrast refers to the unemployment that an economy experiences
due to business cycle recession (Jha, 2019). During recession, there is a decline in aggregate
demand lowering the demand for labor. This leads to cyclical unemployment.
Policymakers though are concerned of both types of unemployment; structural
unemployment is something that policymakers should be more concerned. If the problem of
structural unemployment is not addressed in time then it can lead to long-term
unemployment. Policies therefore should be taken to moderate the impact of cyclical
unemployment and keep structural unemployment within natural rate of unemployment.
Question 5
Question a
Improvement in marketing and selling skills of workers increases productivity of one
group of workers. With increase in efficiency of workers, labor cost decreases. This increases
aggregate supply in the economy. As aggregate supply increases, the aggregate supply curve
shifts outward. An increase in aggregate supply given the aggregate demand increases
equilibrium GDP while reducing the price level.
Figure 3: Impact of increase in marketing and selling skills

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(Source: as created by Author)
Question b
An increase in personal income tax implies a decline in disposable income of
household. As income decreases, people have less income to spend on goods and services.
This reduces aggregate demand in the economy shifting the aggregate demand curve
leftward. As aggregate demand declines, equilibrium in the economy shifts down (Brown &
Narasimhan, 2019). Corresponding to new equilibrium both GDP and price level declines.
Figure 4: Impact of an increase in personal income tax
(Source: as created by Author)
Question c
Trade balance influences aggregate demand in the economy through net export. As
export increases, the nation experiences a higher income from selling goods abroad. This
improves trade balance of the economy. As net export increases, there is an increase in
aggregate demand. With expansion of aggregate demand, the aggregate demand curve shifts

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rightward. The new equilibrium moves up. At the new equilibrium, the economy achieves a
higher GDP and higher price level.
Figure 5: Impact of increase in export
(Source: as created by Author)
Question d
Capital is one of the key inputs necessary for production. If capital destroys due to
war, there is a disruption in supply of capital. The shortage of capital in turn lowers aggregate
supply leading to a supply shortage (Sherman, Meeropol & Sherman, 2018). The aggregate
supply curve thus shifts to the left lowering equilibrium GDP. The shortage of supply
increases price level.

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Figure 6: Impact of destruction of capital
(Source: as created by Author)
Question 6
Question a
Advantages and disadvantages of CPI
The consumption price index is a commonly used measure of capturing movement of
overall price level in the economy. Because of several advantages, CPI is a widely used
measure of inflation. The first advantage of CPI it that it can be computed easily and can be
interpreted simply. It covers a large variety of goods and services that are representative of
overall price level in the economy (De, 2018). Moreover, CPI is a consistent and flexible
measure. The measure is consistent in the sense that it incorporates a basket of goods and
services that is consistent with preference of average consumers. It is a flexible measure that
is adjusted for seasonal variation.