Macro Economics Essay Example | Topics and Well Written Essays - 1000 words

Macro Economics - Essay Example(Sloman, 2006) Keynesians believe that if left to the market forces there is no guarantee that the economy go away achieve a full employment train of gross domestic product. They argue that instead when left on its own economy whitethorn not function as required and may result in high aims of unemployment. Therefore, to control this it is important for the government to intervene. If there is high unemployment the government should opt for deficit financing in order to profit the disbursement in the economy thereby, triggering economic growth. (Bamford et al. 2003) According to the circular flow of income field of study income should always be be to the consumption of domestically produced goods and the withdrawals from the economy. Y= Cd + W Here National Income (Y) flush toilet be defined by the above equation. The withdrawals (W) are make up of net Savings (S), net Taxes (T) and spending on Imports (M). As we already know that the total spend ing in the economy on goods and services is known as Aggregate Expenditure (E). This is made up of the demand for locally produced goods plus the three injections (J) investment (I), government expenditure in the economy (G) and exports (X). (Sloman, 2006) When in sense of balance the Aggregate Expenditure is exist to National Income as injections are supposed to be equal to withdrawals. In the model put forward by the Keynesians in order to get equilibrium national income a line is drawn at 45 degrees. This is because at that point the Aggregate Expenditure will be equal to real GDP level of income. Thus, shown in the diagram below the level of income in the economy will be determined at the point where the AE curves interest the 45 degrees line. go steady 1 The Keynesian income-expenditure approach and aggregate demand and supply Diagram taken from Cliff Notes, 2011 Website Suppose that the economy is initially at the natural level of real GDP that corresponds toY1in Figure1. A ssociated with this level of real GDP is an aggregate expenditure curve,AE1. Now, suppose that autonomous expenditure declines, fromA1toA3, causing theAEcurve to parapraxis downward fromAE1toAE3. This decline in autonomous expenditure is also represented by a reduction in aggregate demand fromAD1toAD2. At the akin price level,P1, equilibrium real GDP has fallen fromY1toY3. However, the intersection of theSASandAD2curves is at the lower price level,P2, implying that the price level falls. The fall in the price level means that the aggregate expenditure curve will not fall all the way toAE3but will instead fall only toAE2. Therefore, the bran-new level of equilibrium real GDP is atY2, which lies below the natural level,Y1. (Cliff notes, 2011) Question 2 In economics, amultiplieris a factor of ratio that measures how much anendogenousvariable changes in response to a change in somewhatexogenousvariable. For example, suppose a one-unit change in some variablexcauses another variabl eyto change byMunits. Then the multiplier isM. (Wikipedia, 2011) When the injections in an economy increases so does the amount of the national income (Y). The question here is by how much? In fact, national income Y will increase in a proportion more than the injections-J. Y will rise by a multiple of J. The number of times Y increases with respect to the change in the injections is known as the multiplier (k). Multiplier is equal to the change in national income Y divided by the change in injections. (Sloman, 2006) Apart from the above explanation above the value of the multiplier can also be determined by the following formula K= 1/ (marginal propensity to withdraw). (Bamford et al. 2003) The four-sector economy is the most