Examine the contentions that all types of investment spending are inversely related to the real interest rate (Mankiw 2007:507)
Macroeconomics Theory The work presented for assessment is all my own work and no form plagiarism in the representation of another person's work has taken place. Signature Date Question 1 - Examine the contentions that "all types of investment spending are inversely related to the real interest rate" (Mankiw 2007:507) Macroeconomics is a major element of economics it looks at the economy performance, structure and behaviour. It takes into account national income, unemployment, inflation, investment and international trade. Its aim is to understand the causes and consequence of short run fluctuations in national income with the long run understanding of economic growth. Both firms and households purchase investment goods, firms will purchases goods to add to there stock of capital or to replace existing capital as it wears out. Households in turn will buy new houses, which is also part of investment. Usually the quantity of goods demanded depends on the interest rate, which measures the cost of funds to finance the investment. For the investment to be profitable it returns must exceeds it cost of burrowed funds. If interest rate rises fewer investment projects are profitable affecting the quantity of demanded goods to fall. An example, a person wanting to buy a new house for a £100,000 facing an interest rate of 7% on a mortgage will pay £7,000 interest per year
How can inflation be reduced?
How Can Inflation Be Reduced? Inflation is a persistent rise in average price level over a year, it is measured through CPI (Consumer Price Index). CPI takes a basket of goods ,which are weighted due to expenditure in a household budget (so you spend more money on food then shoes therefore food has a higher weight). CPI then looks at how the prices have changed and dictates a rate in accordance to the statistics. Inflation usually carries negative connotations as it usually comes in conjunction with economic instability therefore many different methods have been devised in order to avert the problems of inflation and reduce it. An example of high inflation which was reduced is in Britain. In the 1970's inflation was phenomenal and peaked at over 20%, through successful monetary policy however this was mitigated. By raising interest rates it reduces the growth of aggregate demand it encourages saving (which would stifle consumer spending and investment) as well as reducing disposable income. Monetary policy is a proven technique used to reduce inflation. Favoured by the US and UK it looks at the modification of interest rates in order to control inflation (and reduce) this is know as tightening monetary policy. Monetary policy is the control of money supply by the central bank (so in Britain it is the Bank of England and in the US it's the Federal Reserve). Inflation can
Taxation
Economics Practice Essay - 2nd Question 3 (b) Evaluate the potential economic consequences if the UK government were to introduce a significant shift in the sources of its tax revenue from direct to indirect taxes. (30 marks). To begin with, a tax can be defined as a compulsory levy charged by government or by a public authority to pay for its expenditure. The term can be categorised further; whereby direct taxes affect those who receive the benefits of income generated and who are therefore liable to pay the tax, a typical example in the UK being income tax. Whereas in contrast, most taxes on spending are indirect taxes, such as VAT, since it is the seller of the good and not the purchaser who is liable to pay the tax (although this does not mean to say that the seller will not pass on the incidence of the tax through a price rise at a later date). One of the main effects of a shift in tax sources from direct to indirect would be a rise in the level of inequality. That is to say, direct taxes which were previously more dominant would give way to a larger quantity of indirect taxes that are regressive in nature - therefore hitting the poor the hardest as the proportion paid in tax falls as income rises. As a result, the effect of these changes can be illustrated on a Lorenz Curve in the diagram below: As the diagram reveals, the Lorenz Curve deviates by a considerable
DISCUSS THE ALTERNATIVE POLICIES A GOVERNMENT MAY USE TO IMPROVE ADEFICIT IN THE BALANCE OF PAYMENT
DISCUSS THE ALTERNATIVE POLICIES A GOVERNMENT MAY USE TO IMPROVE ADEFICIT IN THE BALANCE OF PAYMENT The deficit in the balance of payment means import bigger than export in the record of transaction in one economy to the rest of the world. The deficits mainly occur through various reasons such as: structural problem, exchange rate position, excess economic demand etc. hence the alternative policies could adopted to reduce this problem. First of all, the structural problem which indicate the products non-competitive, low quality or high price, and this problem will lead reduce in export, and effect the deficit in the balance of payment. In order to tackle this problem the supply side polices has been used, such as reaching and develop the new technologies etc. Doing research in previously experiences, solve self-problem, in order to enhance the quality of the products to make the products more competitive. And reduce the cost of production to influence the price goes down. However, the supply side policy is a long run policy, which may take long time to achieve the result, and amount of money will be cost. Therefore there will not be effectiveness in the short run. Secondly, the exchange rate position is directly affect the export and import. When the exchange rate high, it will be hard to export, because the export become more expensive, the importer may choose other
The rise in youth unemployment is a significant problem for the UK. Discuss
'The rise in youth unemployment is a significant problem for the UK.' Discuss The term 'youth unemployment' covers those aged 15-24, and it is normally regarded as a rather important issue for many governments. All those aged 25 or above are considered adult in this case. 2009 was a difficult year, especially for the classes of 2009, because after leaving school or university, they all want to kick start their careers. But instead they have had a difficult time searching for jobs which they can apply their degree to. Graduates haven't had an easy ride recently because some companies have closed graduate schemes, and are looking to employ more experienced workers, therefore lowering any potential risk in their business. Many graduates are realising that today, a degree isn't going to guarantee success in the job market, especially those who are looking to take a place in a competitive industry, such as journalism. Also, the decline in the manufacturing industry has had an impact on youth unemployment, more those without degrees (or low skills) . because jobs are difficult to get for most young people, many have to resort to having low-paid, low skilled jobs. A study in 2008 confirmed that 12% of 18-24 year olds only had temporary jobs, and 40% of them failed to find permanent work. Also, to make younger workers redundant is much cheaper than someone older because if they have
"Consumption is determined by Income"
"Consumption is determined by Income" Consumption is defined as consumer spending on goods and services over a certain period of time. In this case, disposable income is used as this is the aggregate amount of money a person earns during a given period. There are a number of factors which determine how much a household consumes. The relationship between consumption and these factors is called the consumption function. The most important factor of consumption is disposable income but other factors can bring around significant changes in consumption. One factor of consumption is the amount of wealth a household has. A household is constituted of the general public as distinct from a firm or business. In common parlance the general public is often called consumers Wealth is made up of physical wealth and monetary wealth. Physical wealth is durable items such as cars, houses and furniture whereas monetary wealth is made up of cash, shares and pension rights. If the wealth of a household increases then consumption is expected to increase, this is known as the wealth effect. Another factor of consumption is inflation. This increases the general level of prices and has two effects on consumption. Firstly, if households expect prices to be higher in the future then they will be tempted to bring forward their purchases. Thus a household's anticipation of inflation can increase
Using the data and your economic knowledge, evaluate the contribution that the growth of government expenditure may make to the U.K. economic performance.
c.) Using the data and your economic knowledge, evaluate the contribution that the growth of government expenditure may make to the U.K. economic performance. Government expenditure has a major influence on the U.K.'s economic performance, however, it has to be recognised that it isn't the only factor affecting the U.K's economic performance. Government expenditure can also be seen as current expenditure, capital investment and as transfer payments, e.g. unemployment benefits. Government spending is mainly financed through the means of taxation and government borrowing. To evaluate the contribution the growth of government expenditure may make to the U.K. economy, it would be necessary to assess the government's macroeconomic objectives: Sustainable economic growth, 2% - 'plus/minus 1%' inflation, low and stable unemployment and a healthy balance of payments. For example, if there is a sharp increase in unemployment in the U.K. the government would be forced to pay out more through unemployment benefits and other things such as subsidies for businesses etc, therefore increasing government expenditure, as they attempt to stabilise the U.K. economy. Government spending can have a significant effect on the government's macroeconomic objectives. Economic growth can be affected both in the short and long run by aggregate demand, which includes government expenditure. Short-run
Suppose a government wishes to reduce the level of consumption expenditure in order to reduce inflationary pressure in an econ
Suppose a government wishes to reduce the level of consumption expenditure in order to reduce inflationary pressure in an economy.Explain how Fiscal Policy might be used to achieve this objective and comment upon how effective such a policy may be in reducing inflation. Fiscal policy aims to control the economy and manage the level of aggregate demand in he economy by the use of Taxation and Government Spending. Inflation is the sustained increase in the general price level. Fiscal policy might be used to reduce the level of consumption expenditure in order to reduce inflationary pressure in an economy. Slowing down the economy can lower government spending. As government spending is one of the four elements of AD and a decrease in it will lead to a decrease in the total demand in the economy. This would mean that firms would not have to increase the prices. This would therefore control the inflation rates in the economy. The diagram above shows how a decrease in government spending affects the AD curve. The AD curve shifts to the left from AD to AD1. The price level would decrease from P to P1 and the output levels will also decrease from Y to Y1. Governments can also increase Direct Taxes (Income Tax), Indirect Taxes (VAT) and Progressive and Regressive Taxes. If Direct Taxes increase then people will have less money because they have paid higher taxes. This would
What are the current targets of macroeconomic policy in the UK and how can they be achieved?
Question 2 What are the current targets of macroeconomic policy in the UK and how can they be achieved? The United Kingdom is a highly developed country; it's the fifth largest economy in the world, and the third most populous country in Europe with a population of over 60 million people. The UK has a very sound macroeconomics system with four main objectives which helps sustain its status as a G8 member. The macroeconomic policy in the UK is influenced by two set of forces, the market by looking at supply and demand and those induced by government intervention. As a whole macroeconomic objectives in the UK are concerned with the overall performance of the economy. It relates to high economic growth, relatively stable price level and low and stable level of unemployment in addition the last goal is related to the balance of payments and the exchange rate may be distinguished, but it has no immediate or lasting advantage to the country of its payment position. I will deal with each goal in turn. Economic growth is a desirable objective, it's the major cause of rising living standards its has been a dominant forces for industrial nations over 200 years. Even small differences in growth rates can lead to large differences in income per head due to the power of compound interest. Since the end of the 2nd world war the rate if economic growth has averaged 21/2 % per annum. The
selective logging on impact of market economy
Show how selective logging can be seen as an impact of the market economy on the environment. Discuss the range of possible solutions that there might be to this problem. The Amazon rainforest is one of the world's most marvellous natural resources. The market economy is potentially damaging it. The first section of the essay will discuss what a market economy is. It will explore the impact of economic activity in market economies on selective logging. Furthermore, discussing how selective logging affects the wider ecosystem. The second section will discuss which solutions could be taken to limit the impact of economic activity; also exploring weather these solutions are realistic and/or practical. Economics attempts to alert society to the questions and point out the consequences. "An economic system, which resolves the basic economic problem mainly through the market mechanism". (Anderton 2006, p 286) This is how the market economy is defined. There are many characteristics of a market economy. For example, economic agencies i.e. government institutions or individuals with the sale being the transfer of property rights. The price mechanism is an important factor in a market economy because the economic agents: buyers and sellers determine the prices within the economy. Adam smith was a political economist. He coined the metaphor, "the invisible hand". Smith
