Economics 1 Homework: Economic Principles, Trade, and Tax Cut Analysis

This economics assignment addresses several key macroeconomic concepts. It begins by examining the self-adjustment mechanism in an economy and the role of government intervention. The assignment then explores the causes of economic booms and busts, emphasizing the impact of demand fluctuations. Consumer confidence, influenced by political and financial events, is analyzed for its effects on aggregate demand. The assignment also investigates the relationship between tax cuts and consumer spending, considering how income levels affect consumption patterns. Furthermore, it delves into the impact of monetary policy on housing prices, specifically focusing on the effects of interest rate changes. Finally, the assignment discusses the implications of international trade, highlighting the role of firms in the global market and the effects of currency depreciation on exports and imports. The analysis uses examples to clarify concepts, such as the trade between the United States and the United Arab Emirates, and cites relevant economic literature.

ECONOMICS 1
Name
Professor’s Name
Economics
Date
Q 1
Yes, in the self-adjustment mechanism, economy should return back to full employment
output without government or policy makers’ intervention. Modern government will intervene in
case of economic disequilibrium in order to correct the imbalances (Hill 154). Modern
economies does not believe that economic shocks matters in the short run, thus they will always
want to use both monetary and fiscal policies to correct the economy without living the economy
to self-adjust.
Q 2
Economic bust is due to substantial decline in the demand of goods and services in an
economy. As a result, fall in demand leads to surplus of goods in the economy. Economy will
boom due to increase in demand for goods leading to rise in employment and output in the long
run (Coppock 67). Rise in inflation rate, there will be pressure for extra investment leading to an
end of economic boom
Q3
Consumer confidence changes as a result of political, financial, and international events.
Confidence is either positive or negative, depending on the economic events. In case an economy

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faces financial shock and workers are retrenched, consumers will be financially worried about
the future thus starts saving more income than spending (Hill 153). This reflects a negative
change in consumer confidence thus leading to a decline in aggregate demand that exacerbates
the economic recession.
Q 4
No, consumer will not constantly spend the same tax cut percentage since they might
spend more or less depending on the tax cut policy. Tax cut is pegged on the consumer’s income
while the consumer’s consumption depends on the income (Hill 60). Poor people will consume
extra with a tax cut since they already experience deficiency that is not able to satisfy their
wants. Increase in poor consumer’s income leads to extra spending.
Q 5
Purchasing a home requires a person to take a mortgage which is in form of a loan but
bears a disproportionate burden of restrictive monetary policy. According to hill (331), when
interest rate changes, its impact on the housing prices is so high due to higher purchasing power
of the houses that is acquired through mortgages than its event on pizza which has low cost and
risk incurred when purchasing.
Q 6
International trade provides economies an avenue to engage in export and import of
goods and services. However, to compete in the international market, firms must produce
standard goods and will be having economic advantages over the competing industries. Increase
in the prices of the locally produced goods leads to low demand since consumers will shift to
buying the imported substitute goods. International trade might lead to stagnation of domestic

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firms in terms of low output that is brought about by high production prices (Coppock 169).
Without government intervention, domestic firms will not be able to compete in the international
market since their products will be lacking diversification which leads to low demand, thus low
prices in the international trading centers.
Q 7
Assuming that the United Arab Emirates is trading with the United states of America,
then at the same time, the US $ depreciate while the UAE dirham remains or appreciate; the
manufacturer of cars from the USA to UAE will be high since the prices of the goods in the UAE
from USA will be very low. This is due to depreciation of the dollar currency that encourages
exports i.e. cheap foreign cars because the dollar currency has depreciated. Depreciation in dollar
currency leads to low export since the locally produced goods will be expensive in the
international market (Coppock 169). However, foreign manufacturer of car will experience a
higher sale of car as a result of depreciation in dollar currency.

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Works cited
Coppock, Lee, and Dirk Mateer. Principles of macroeconomics. WW Norton, 2017.
Hill, Cynthia, and Bradley Schiller. The Micro Economy Today. McGraw-Hill Higher Education,
2015.