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The Business Cycle and Macroeconomic Objectives - Term Paper Example

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The paper has dealt with some essential concepts of economics like the circular flow of income and the inner flow of income. Various elements like injections into the markets and the leakages of the market have also been discussed. …
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The Business Cycle and Macroeconomic Objectives
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The Business Cycle and Macroeconomic Objectives

Download file to see previous pages... Recognition of the relationship of withdrawals and injections has also been made which allows better overview of the markets. The relationship of withdrawal and injections has shown an indirect link similar to the savings and investments, taxation and government expenditures. The last and most essentials element of this paper is the discussion of the circular flow of income and the four macroeconomic objectives i.e. a) Economic Growth, b) Reduced Unemployment, c) Rise of Inflation, and d) Deterioration of Balance of Payments.
The figure below provides a view on the relationship of the four main objectives of macroeconomics. The figure shows how in a short term the four objectives, i.e. faster growth of output, lower unemployment, lower inflation and the avoidance of balance of payments deficits are related to each other (Sloman and Sutcliffe). The relationship depends on the aggregate demand which is influenced by each phase of the business.
a) Expansionary Phase: In this phase (phase 2), the aggregate demand grows very rapidly and the gap between the potential output and actual output is relatively narrower. Here the growth in the output will be relatively rapid and the levels of unemployment will be faced with a drop as well. This provides a solution for two issues however it leads to the other two sectors to be faced with issues (Sloman and Sutcliffe). With the higher levels of shortages the inflation is also affected and this leads to the deteriorating balance of payments which in turn leads to the domestic goods being less competitive in the international markets.
b) Peak: At phase three of the cycle i.e. the peak phase, the level of unemployment is at the lowest and the output of the company is at the highest level. ...Download file to see next pagesRead More
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