Individual Macroeconomics Assignment: ECO2103 Analysis Report

This macroeconomics assignment analyzes five articles related to various macroeconomic factors, including global economic slowdown, inflation rates in India, unemployment in the United Kingdom, capital formation in India, and government expenditure cuts. The analysis explores the impact of these factors on economic growth, employment, and price levels. The assignment applies macroeconomic concepts such as expansionary monetary policy, contractionary fiscal policy, and the relationship between savings, investment, and capital formation. It examines how governments use monetary and fiscal policies to address issues like inflation, unemployment, and fiscal deficits, aiming to improve economic equilibrium and promote growth. The articles are sourced from various news outlets and business publications, providing a real-world context for the macroeconomic principles discussed.

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

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Table of Contents
Chapter 1....................................................................................................................................2
....................................................................................................................................................3
Chapter 2....................................................................................................................................3
Chapter 3....................................................................................................................................5
Chapter 4....................................................................................................................................6
Chapter 5....................................................................................................................................7
Conclusion..................................................................................................................................8
References................................................................................................................................10

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Chapter 1
Source
https://www.thehindu.com/business/Economy/global-growth-to-slow-in-2019-says-world-
bank/article27474788.ece
Summary
It is forecasted that in 2019, the global economy will face a slowdown economically.
The developed countries will face the greater impact, as the slowdown in growth will occur
there; however, the South-East Asia experiences steady growth. The economy of the world
has been expected to slowdown by 2.6% in 2019. On the other hand, the Brexit will bring
instability in the economy.
Analysis
In world there is a fall in consumption and due to that, the consumer demand has
fallen. Goods in both international and domestic market are suffering from poor demand.
Apart from fall in demand, the industrial sector is suffering from low investment. Therefore,
the industrial sector is experiencing a crunch and exerting negative pressure in the job sector.
Workers are earning less and thus demand lowers further causing price level to fall, which
pulls down the inflation below natural rate. Hence, this economic condition is not desirable
and thus the Central Bank of the affected countries would opt for expansionary monetary
policy (Blanchard et al. 2017). Under the policy, Central Bank would reduce the bank rate
and thereby reduces the price of lending. As a result, the investors and producers would
invest and produce more and with induced effect workers wage rises. Owing to increase in
production, the supply of the economy increases. On the other hand, the increase in wage of
workers would increase the consumption due to increase in disposable income and thereby

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demand in the economy rises (Wang, Caminada and Goudswaard 2014). Hence, these
changes in the economy causes the aggregate demand and aggregate supply to rise and in the
AD-AS model rightward shift of both the aggregate supply and aggregate demand curve can
be observed, which improves the economic equilibrium of the country and helps the economy
to grow faster. The complete mechanism is shown in the diagram below.
Figure 1: Expansionary monetary policy
Source: (Created by the Author)
Chapter 2
Source
https://www.businesstoday.in/current/economy-politics/retail-inflation-cpi-8-month-high-
june-2019-iip-may-2019/story/363869.html
Summary
The retail inflation rate in India rises to 3.8%, which is the eight-month high. The
push in the retail inflation rate would also increase the overall inflation rate of the country. In

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response to unexpected rises in inflation, the Reserve Bank of India has taken measure to
improve it by reducing the bank rate.
Analysis
Inflation rate the article speaks about is measured based on the Consumer Price Index
(CPI), which considers price of consumer goods only that means it does not include price of
houses, rental expenses and any other such expenses. Growth in the wage rate will cause the
disposable income of individual to rise. As a result, the demand for goods will rise too and
thereby the price level increases. With increase in price level, inflation rate would also rise
(Giannoni 2014). Furthermore, the incident of Brexit would definitely affect the economy as
expected. Relationship of the UK would dampen with the member countries of the European
Union and thus the business sector will face financial crunch. Apart from this, the exchange
rate of pound will fall as depreciation of pound occurs due to poor trade relationships.
Therefore, the price of imported goods will rise and earnings form export reduces. Therefore,
inflation rate increases further and affecting the economy adversely. Thus, to encounter the
negative effects of inflation rate the government would implement contractionary fiscal
policy. Under the policy, the government increases the tax rate and as a result, the liquidity of
the income decreases and the demand of the economy fall. With decreased demand, the
aggregate demand of the economy falls and the aggregate demand curve shifts left. The
leftward shift of the aggregate demand curve thus reduces the price level and thereby the
inflation rate. The mechanism of fall in price level is depicted in the AD-AS diagram given
below.

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Figure 2: Contractionary
fiscal policy
Source: (Created by the Author)
Chapter 3
Source
https://www.bbc.com/news/business-49002056
Summary
Unemployment rate in the United Kingdom is at low 3.8% and the number of people
that are unemployed is 1.29 million. After 1992, it is the lowest number of people that are
unemployed. The low unemployment rate is probably due to increase in part time workers.
Moreover, the rate of wage growth is 3.6%. However, the Brexit possibly would not allow
the UK to experience low unemployment for long.
Analysis

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The primary cause of increased rate of wage in the United Kingdom is the amendment
made in the minimum wage rate. Thus, major economic improvement has not occurred in the
UK that resulted in the rise of wage rate. The wage rate when adjusted by inflation, it is found
that in real terms the wage is lower than the value it has during the period of recession in
2008. Alternatively, low unemployment rate is a good thing for the economy of the country,
but it is not expected to persist. The Brexit will pull the unemployment rate up soon and push
the economy into slowdown by adversely affecting the business sector. Therefore, it seems
that unemployment rate will rise when business sector responded to this economic down turn
by making worker retrenchment and wage rate cuts (Van Kersbergen, Vis and Hemerijck
2014). The economy, thus suffer from undesirable situations after the Brexit. The
deterioration of economic equilibrium will take place and continue for a period until when the
Brexit effect cools down and the government take suitable economic measures to improve the
economic equilibrium and thereby lifts the wage rate up and lowers the unemployment rate.
The United Kingdom needs to improve its trade relations as the Brexit hampers it too and
would be one of the reasons for poor economic conditions.
Chapter 4
Source
https://www.thehindubusinessline.com/opinion/budget-must-help-enhance-capital-
formation/article28285984.ece
Summary
In India, the rate of unemployment is rising and the business sector is suffering from
low investment and the growth of the economy is slowing down too. Thus, it can be inferred
that the country is not in a good state as far as economy is concerned. The presentation day of
this year’s Budget is nearing and it is expected that the government would come up with

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policies that addresses the capital formation and savings rate to deal with the persisting poor
economic conditions.
Analysis
The primary requirement for the Indian economy to dealt with the current issue of
rising unemployment rate and low economic growth is huge amount of cash inflow in the
economy that in turn help the industrial sector to make more investments. More investments
would expand the economy, there will be need for more workers, and thereby employment in
the economy rises. As a result, the income of individual will rise and the economy will have a
boost due to increased demand. Moreover, making more investments require more capital in
the economy and that can be increased either by more savings that are domestic or by
allowing more foreign direct investment (FDI) in the country. Theory of economic growth
states that more capital accumulation or formation can take an economy to an improved
steady state equilibrium but for that, more saving s is required as capital formation is an
increasing function of savings rate (Jagadeesh 2015). From theory of national income it is
known that savings equals investment. Thus, for greater amount of investment saving is the
primary tools available domestically. On the other hand, if the government relaxes cap on
FDI, then there will be more capital formation as well. Thus, it is for the government to
decide which measure to implement to form more capital in the economy and thereby
increases investment to improve the economy.
Chapter 5
Source
https://www.business-standard.com/article/economy-policy/govt-makes-highest-ever-
expenditure-cut-of-rs-1-4-trillion-for-fy19-119060401463_1.html

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Summary
In order to meet the target 3.4% fiscal deficit, the government of India has cut 1.4₹
trillion in government expenditure. The expenditure cut is funded by the cut in subsidies;
however, there is no cuts in pension funds as it cannot be delayed.
Analysis
Expenditure is a macroeconomic component and it has significance in controlling the
economy of a country. Economy changes with the change in expenditure of an economy be it
consumer expenditure or government expenditure (Alshahrani and Alsadiq, 2014). In this
case, considering the government expenditure as the selected article speaks about it. Fiscal
deficit is a problem of an economy that arises due to over government expenditure, debt
financing or less collection of revenue. Thus, high fiscal deficit give rise to lower economic
growth, as government cannot make the required amount investment in the development of
infrastructure. Other effects of fiscal deficit are low investment in private business sector both
manufacturing service. Hence, the economy crunches and experiences fluctuations that give
rise to higher inflation and unemployment. Therefore, to support the necessary investments
the government cut its expenditure related to subsidies. The cut in expenditure would ease up
the pressure generated by the fiscal deficit and support the economy to become stable. On the
other hand, government increases expenditure when the economy experiences recession. The
government increases expenditure directly by increasing the amount of subsidy, providing
bonus to the employees and indirectly by cutting tax rates. Owing to these policies, the
liquidity of the economy increases and thereby amount of disposable income increase too. As
a result, aggregate demand in the economy rises, the industrial sector improves, and inflow of
cash rises in the economy resulting in improvement in economic equilibrium. Therefore,
expenditure plays a crucial role in driving an economy in different ways.

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Conclusion
In the above five chapters analysis of five articles have been done and every article
pertains to various macroeconomic factors. From the analysis of the articles, it is found that
every country focuses on inflation and unemployment and then improves the economic
growth by implementing various kind of monetary and fiscal policy. The policies are
implemented because the economic factors do not change as per the desire of the government
if left to alter under free economic movements. Therefore, as per requirement it is important
to control the economic factors.

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References
Alshahrani, M.S.A. and Alsadiq, M.A.J., 2014. Economic growth and government spending
in Saudi Arabia: An empirical investigation. International Monetary Fund.
Blanchard, O., Ostry, J.D., Ghosh, A.R. and Chamon, M., 2017. Are capital inflows
expansionary or contractionary? Theory, policy implications, and some evidence. IMF
Economic Review, 65(3), pp.563-585.
Giannoni, M.P., 2014. Optimal interest-rate rules and inflation stabilization versus price-level
stabilization. Journal of Economic Dynamics and Control, 41, pp.110-129.
Jagadeesh, D., 2015. The impact of savings in economic growth: an empirical study based on
Botswana. International Journal, 10.
Van Kersbergen, K., Vis, B. and Hemerijck, A., 2014. The G reat R ecession and Welfare
State Reform: Is Retrenchment Really the Only Game Left in Town?. Social Policy &
Administration, 48(7), pp.883-904.
Wang, C., Caminada, K. and Goudswaard, K., 2014. Income redistribution in 20 countries
over time. International Journal of Social Welfare, 23(3), pp.262-275.