Macroeconomic Theory ECON302 Essay Example | Topics and Well Written Essays - 1250 words

Macroeconomic Theory ECON302 - Essay ExampleThe effects of government intervention, primarily in the form of fiscal form _or_ system of government, works towards stabilizing the business cycle, done government spending (G) or flat rate tax (t). This helps to avert the effect of either recession or inflation. According to The Keynesian Income Model, the effect of government spending (G), is to stimulate economic activities through increasing the money available in circulation, which enhances the purchase of goods offered by businesses and then uplifts the business cycle from recession back to boom (Salant, 69). On the other hand, the effect of a flat rate tax (t) is to reduce the rate of inflation, through the government reducing the money that is in circulation. This serves to reduce the prices charged for goods, since there is not much money circulating in the economy. The marginal propensity to merchandise (f) is yet another factor that can play a role in correcting the imbalan ce on the business cycle. While there is much income indoors an income, an increased marginal propensity to import takes away income from the domestic economy to a different country, thus reducing the income. Alternatively, where there is low monetary circulation inwardly an economy, a reduced propensity to import will serve to reduce e the money moved out of the economy, and thus increases the money circulating domestically (Carbaugh, 204). Question 2 The concept of short-change analysis refers to the economic aspect of analyzing the likely outcome of the production decisions by a firm in the unaired future, with the intention of explaining the likely future firm supply and its implications (Salant, 63). This analysis is pitched fundamentally on the law of diminishing marginal returns, where a firm experiences a decrease in marginal returns, on the event that multivariate inputs are added in larger amounts to a fixed variable (Carbaugh, 144). In this case, a short run analysis can take the form of assessing the impact of adding large amounts of variable inputs such as labor, which can be added to a fixed variable such as capital. The effect is that the productivity of that firm will continue increasing as the quantity of labor is increased, until after a certain train of productivity, when any additional unit of labor to the fixed capital will result to corresponding reduced production units (Carbaugh, 236). The effect of expansionary fiscal and monetary policy is to increase the money that is circulating in the economy. Thus, the Impact of the expansionary monetary and fiscal policy in the SR under a closed economy is to set down the inte peacefulness grade, increase the money supply and thus increase the quantity of goods and services demanded at a given price (Salant, 79). Question 3 The race between Balance of payments (BOP) and the foreign exchange markets There exists a relationship between the Balance of payments (BOP) and the foreign exchange markets in that it is the foreign exchange rates that affect the prices at which a country trades its commodities (Carbaugh, 491). The Balance of payments accounts for the transactions that are made between a country and the rest of the world. The exports that a country makes to the rest of the world form the credit of the BOP, since they increase the mone