Macroeconomic Theory ECON302 - Essay Example

The effects of government intervention, primarily in the form of fiscal policy, works towards stabilizing the business cycle, through 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 thus 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 import (f) is yet another factor that can play a role in correcting the imbalance on the business cycle. While there is much income within 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 within 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 analysis refers to the economic aspect of analyzing the likely outcome of the production decisions by a firm in the near 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 variable 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 level 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 lower the interest rates, increase the money supply and thus increase the quantity of goods and services demanded at a given price (Salant, 79). Question 3: The relationship 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