Macroeconomics

Only available on StudyMode
  • Download(s) : 52
  • Published : March 30, 2013
Open Document
Text Preview
Macroeconomics
Question 1
What is the study of macroeconomics concerned with? Discuss in detail the major macroeconomics issues known to you. Macroeconomics is concerned with the economy as a whole, as one very large market. It looks at how the government manages the economic market as well as economic growth and living standards, Unemployment, Inflation, Business cycles, Including its recessions and expansions. All major Macroeconomics issues play a critical role in the economic activities as a whole. Economic Growth and living Standards

Economic growth shows the rate of growth of national output, the steady increase in the quality and quantity of goods and services the economy can produce Standard of living in macroeconomics gives people their needs and wants to make their lives healthier, safer and enjoyable. Unemployment

In macroeconomics unemployment refers to number of people looking for work, but not currently have a job. It is an issue as it all has to do with how the economy is doing. With less demand in products, firms need fewer workers. Therefore it means workers losing their jobs, leading to unemployment. Inflation

Inflation is the frequent increase of price in money. In macroeconomics, inflation is an issue as it affects the supply and demand in price levels and national output. Business cycle
The Business cycle consists of four phases:
* Contraction phase ( Slowdown or recession in economic activity) * Trough phase (Lower point of the business cycle, Recession) * Expansion phase (A rise in the economic activity)
* Peak phase (Highest point of the business cycle)
All four phases cause a change in the expenditure levels of consumers and firms. It is vital that the business cycle is predictable in its economic activity, so that a firm is able to achieve financial success. Question 2

(a) Discuss the concept of the circular flow of income clearly illustrating with examples the essential components involved. The circular flow of income is a model that shows the circulation of goods and services and factors of production between firms and households. Firms provide households with goods and services in exchange for consumer expenditure and factors of production- Land, labour, Capital and enterprise, in order to keep the flow of income circulating.

Spending On goods and services
Spending On goods and services

Firms
Firms
Households
Households
Factor Incomes
Factor Incomes
Services of productive factors
Services of productive factors
Goods and services
Goods and services

The inner activities in the circular diagram shows the flow of resources example, a resource such as labour flows to the firms from households, and goods and services are produced and flow back to households. The outer activities show the stream of financial flows, between the two. With the salaries and income that people earn whilst working, they use this financial resources to buy goods and services, put in the market by firms.

(b) Illustrate with a diagram, the roles played by the following in the circular flow of income and what each consists of:

* Consumption
* Injections
* Withdrawals and
* Equilibrium

INJECTIONS
INJECTIONS
The circular flow of Income

Export Expenditures (X)
Export Expenditures (X)

Investment (I)
Investment (I)
Government Expenditure (G)
Government Expenditure (G)

Firms
Firms
Abroad
Abroad
Govt.
Govt.
Banks, etc
Banks, etc

Factor payments
Factor payments
Domestic consumption of commodities
Domestic consumption of commodities

Net Savings (S)
Net Savings (S)

Net Taxes (T)
Net Taxes (T)
Import Expenditure (M)
Import Expenditure (M)
Net Taxes (T)
WITHDRAWALS
WITHDRAWALS

Households
Households

The circular flow of income consists of consumption, Injections, withdrawals (leakages) and equilibrium. *...
tracking img