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Macro essay question - Assignment Example

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It elaborates the short run booms or recessionary stages of the economy. AD is the gross demand generated within an economy through consumption spending (C), government expenditure…
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Macro essay question

Download file to see previous pages... The theories of Economic Growth are used to formulate functional relationships in separate economic models. Money, balance of payment, goods and credit functions are made through these theories. According to the theory, demand=supply, when an economy will be in equilibrium producing the optimal level of output. When the economy produces potential output, with the given state of labor, capital and technology resource, then it generates full employment. However, it should be noted that even in the full employment level, an economy can experience a natural unemployment rate of utmost 4.2%. Any changes in the equilibrium are automatically rectified through price and quantity adjustments.
Business Cycle and Economic Growth Theories are important because it helps to forecast the AD and potential production level of an economy. The direction of prices and employment opportunities are determined by AD. On the other hand, the long run economic prosperity of a nation is analyzed through its potential production level. However, AD and potential output of an economy experiences a directly proportional relationship with each other. This is because when AD increases, the economic agents of a market invests more in capital, labor and technology and hence reaches the potential production level.
During an economic recession, the AD is less than AS of a market. If the interest rates are lowered then the cost of borrowing money will fall. This will enhance the investment opportunities in the market and expand the scopes of foreign trade. The gross employment opportunities will rise with increase in investment expenditure. With devaluation of exchange rates, the exports of the country will become cheaper than the imports. Finally it will generate a higher demand for domestically manufactured relatively inexpensive goods of the economy and hence increase the AD. The market will be out of recession with rise in AD.
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