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Apply appropriate macroeconomic analysis - Essay Example

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Name Professor Course Date Apply appropriate macroeconomic analysis Introduction Macroeconomic questions are normally challenging therefore virtual economy assist in suggesting the outline of the presumed effects of modifications by the scheme. The pies intends to show the effect of cut in ten percent in the government expenditure on different economic aspects such as inflation, national income, debts, unemployment, taxes economic growth and the exchange rates…
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Download file to see previous pages The economic profit is attained from the difference of national income and the addition of MPL x L to MPK x K. this can be summarized into the formular below. Economic Profit = Y – ((MPL x L) + (MPK x K)) Hence, Y is connected to unemployment, the available capital and the paid wages. The disparity between Y in presence or absence of lowering G is relevant to the government’s higher savings. According to the curve, it can be suggested that the government saves money by lowering G. in the short run there is decrease from 2.79% to 1.13% in the year 2003 while in the long run in 2009, there is an increase to 3.4% from 2.5%. in the IS-LM model, the change in the financial policy attributes to shifting of IS along the LM curve hence declining Y might accompany a contradictory policy. There is rise in the unemployment curve after reduction of G by 10% . This is evident in the decrease of the demanded labour causing the decrease of the Y. furthermore, it is shown that wage rigidity results in to unemployment. The need for labour declines with the decrease in Y and so the unemployment or Y reduces, hence wages maintain the level and unemployment increases. Wages change the market adjustments till the decreasing unemployment in the long run. Inflation relates negatively with unemployment. The decreasing inflation is caused by the rate of unemployment. Thus, declining unemployment causes increasing inflation since low wages and increased investments in the long run. In 2006 there was an inflation standing at 2.24% without the introduction of the change as compared to -1.84% caused by the change. The multiplier effect suggests that the government debt is also affected by decreased government expenditure. The decrease of Y is greater than the decrease in the expenditure leading to reducing taxes therefore a greater deficit in budget results. More increasing Y debt reduces. This explains the decrease in the budget deficit in the long run. The virtual economy model illustrates the exchange rate. The increase expressed is a decline in theory since the IS curve shifts to the left because of the cut in government expenditure. The subject virtual economy illustration is from the fact that it relies on the models utilized by American economy. Hence, the exchange rate has to be observed differently. The exchange rate does not directly influence the national income since the net exports rice in a laissez-fair economy whenever e is little. Nonetheless, according to this illustration, it is more costly to import product from foreign countries. Selected Policy Mix The general target of the government is to stabilize the economy rather than upsetting it. There are some economists suggesting that the government has to disturb the economy at some instances to keep it balanced. The United Kingdom policy maker should come up with the policy that will contain these challenges. The government should adopt fiscal policy. Adopting this policy will enable the government to achieve stable exchange rate as result an equilibrium balance of payment will be achieved. Thus there is an inherent belief that the economy is unstable with shocking influences on the demand and supply. Conversely, economists feel that the economy is always stable in itself in spite of bad policies that lead to acute fluctuations. Hence the ...Download file to see next pagesRead More
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