Peculiarities of Macroeconomic Analysis - Essay Example

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. The government expenditure cut by ten percent According to Mankiw and Taiylor, National; Income is the total goods and services supplied thus, implies to the total actual wages paid to labour (MPL x L) and the overall real benefits to the owners of capital (MPK x K). 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 view to what degree financial policies should be applied relies on the opinions of the specific opinion. The overriding intent by both of the postulations is the economy which is exceptionally stable without significant fluctuations. Nonetheless government always endeavor interacting with the economy to respond on shocks and try to impact the economy positively. The reaction on shocks is the inside tag that takes longer to detect shock and effect it. The influence of the economy, the outside tag outlines the introduction of policy and its effect to the economy. Because both monetary and the fiscal policies have variant lags, a selection can be made by defining the acceptable duration till the occurrence of the economy changes. However, there is no definite means of certainty on the manner in which the economic changes will respond to the policies. A number of economists have proposed that it is preferable to let the economy regulate itself naturally without much influences on it by politicians or the so called “strategists”. The selected policy mix plus the 10% decrease in the government expenditure is a decrease by 2% in the tax rate to 20% a decline of the greater threshold rate to ?25000 annually and an elevation of the individual allowances to ?6000 annually. These alterations have been executed since the economic response is softened. This was an attempt to lessen the extremity of the fluctuation by the decline in the government expenditure to stabilize the economy. The decline in G is compared with the tax cuts that have opposite repercussions. Hence the reduction in government expenditure is less due to tax cuts. It is significant to note that both modifications in government’s fiscal policy since the monetary supply alteration is not deliberate. However, alterations in fiscal policy equally affect the market. Hence, the fiscal and the monetary policy cannot be observed distinctively but can be influenced with the policy applied to result into the economy change. In this scenario, declines kin the G and tax revenue are fiscal policies that operate oppositely. Referring to IS-LM model, a decrease in government expenditure shifts the IS curve leftwards. Hence, tax cuts shifts the curve to the opposite direction, towards the right. This is observed in cases where the economic growth is shown with the policy mix but without any change. The GDP still declines to 1.49% in the year 2003 but not significantly as in other cases but increases in the long run. According to the observations, policy mix attributes to more increase in the national income in the long run as compared to its absence. The decline in unemployment has the meaning of this situation due to the increased demand of commodities in the long run. Moreover, inflation is equally influenced in the similar manner since the IS curve does not shift much. With the changes imposed, the unemployment decreased to 2.61% in the year 2009 but this is not as compared to the 4% without the changes. Similarly, inflation increased to 2.25 from 2.075 in 2009. The government can implement monetary policies to prevent further increases in inflation such as reduction in money supply. The policy makers are in support of decreasing inflation due to its effects on economic growth. Debt and borrowings significantly determines focus of the government policies. The policy mix attributes to more increase in debt and borrowings as compared to 10% decrease in the government expenditure. The tax cut revenues reduction attributes to this effect. There is increase in budget deficit in the short run while the long run results into a decrease. The people have much money to spend on commodities that increase the national income in return and eventually increase tax revenues. The government borrowing curve even depicts a decrease beyond 0 by 2009. Thus, the outcome excess can be used in settling debts. Hence the shown exchange rate decreases meaning that it gets affordable to purchase goods. The net imports declines as it gets more expensive for other nations to purchase goods in the economy. Conclusion The economy of a country changes continuously since each element affect one another. Hence, it is not easy to come by a point in which all the variables are at equilibrium. Simplifications as well as the complete markets have been applied as methods in determining the appropriate policies. Complete markets are perfection through which there are thoughts that agents can exchange all products dependently on the foreseen status of the environments. In case the consumers save more, the markets become incomplete and the firms can not comprehend their next move. Nonetheless, unemployment is one of the stable variables in the long run. Works Cited Blanchard. O., Amighini, A. and Giavazzi, F., Macroeconomics: A European Perspective, Pearson Education. 2010 Biz/Ed. Virtual Economy. UK: Biz/Ed http://www.bized.co.uk/virtual/economy/index.htm retrieved on April 28th 2013 Mankiw, G., Macroeconomics, 7th Edition, Worth Publishers. 2010 Mankiw, G.,. Principles of Macroeconomics, 6th Edition, Cengage South-Western. 2011 Griffith, A. and Wall, S., Applied Economics 12th Edition, Pearson Education. 2012 International Monetary Fund (IMF). Policy Actions Improve Prospects for Global Economy. IMF's Advice, Money Help Combat Global Crisis. IMF http://www.imf.org/external/np/exr/key/finstab.htm retrieved on April 28th 2013 Gregory, Mankiw. 2005. The Savers-Spenders Theory of Fiscal Policy: Corrigendum. The American Economic Review, 95(5): 1752-1752. Currie David. Macro Economic Analysis London: Nirali Prakashan, 2012 pp6-34 OECD. Better Policies for Better Lives: Monetary and Financial Issues. UK: OECD retrieved from http://www.oecd.org/finance/ on April 28th 2013 Sampat, Mukherjee. Modern Economic Theory. London: New Age International, 2007 Read More