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## Introduction To Microeconomics

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## Introduction - Introduction To Microeconomics

### 1. Question 1

#### 1.1Caclculation the value of aggregate saving

Aggregate saving = Aggregate income - consumption

Aggregate saving = £ 4000-(200+0.8y)

Aggregate saving = £ 4000-200-0.8y

Aggregate saving = £ 3800 -0.8y

#### 1.2 Calculation the equilibrium level of national income

The consumption function is C= 200+0.8 Y

At Equilibrium level of income = AS=AD

Y=C+I

=>Y=200+0.8Y+600

=>y-0.8y=600+200

=>0.7y= 800

=>Y=800/0.7= £1143

#### 1.3 Calculation the level of aggregate consumption at the equilibrium level of national income

The consumption function is C= 200+0.8 Y

At national income 800, consumption expenditure is

C= 200+0.8(1000)

= 200+8000

=8200

Aggregate consumption expenditure is 8200

#### 1.4 The Calculation of national income

The consumption function is C= 200+0.8 Y

Y=C+I

=>Y=200+0.8Y+800

=>y-0.8y=800+200

=>0.7y= 600

=>Y=600/0.7= £857

### 2. Question 2

#### 2.1 Discussion of the reason regarding rise in real Gross Domestic Product

As stated by the author Farina et al. (2019) the increment of Gross domestic product does not actually represent the \growth of a country and economy. The Gross domestic product must be divided by the country's inflation rate to measure the real growth of an economy. In this study the rise of GDP are mainly two sources of economic growth. The main five factors that cause the rise of Gross Domestic Product are firstly growth in the size of the workplace and growth in productivity, literacy rate of the country, the natural resources of the country, physical capital of the country and the living standard of the individual of that country. The gross domestic product measures the total output of the country by government expenses, investment, and consumption of people. As opined by the author Nguyen (2018) generally the increment of the living standard of indium\ideal can cause a rise in GDP. In the economy, living standards are a key that inflames the individual.

### 3. Question 3

#### 3.1 Explanation of likely effect of a fiscal expansion financed by using the IS/LM

The main impact of fiscal expansion is financing that helps to increase the goods demand and services. It can lead to an improvement in the price of a product and the output of the product. In terms of effect of implementing the fiscal expansion policy, which are as follows: increasing the inflation rate, deficit in the growing trade and third it increases the interest rate, which is not good for a growing economy. Due to the increment of interest rate, the private sector cannot be able to borrow the funds for expansion. Whether it can increase the inflation rate is not good as a view of the economy. it can reduce the living standard of an individual. Due to implementation of fiscal policy, it reduces the trade deficit, which is not good for trade globally. If an economy cannot trade properly that cannot fill the Gap of the economy.

#### 3.2 Explanation of national debt and lower of percentage

As expressed by the Nyangarika (2018), National debt may be regarded as the estimated money, which has been borrowed by the government of the country on a large basis. Hence, it is regarded as the government spending which causes a deficit in the budgeting of the country during the expansion of an economy. It is necessary to keep the national debt on a downward scale as a percentage of GDP which can be a good thing for the country on a large basis. Maintaining the percentage of national debt at a low level can help the government to stimulate the economy by generating tax revenue in a huge manner. Hence, the GDP ratio depicts the capability of the country in making payments of debts, which represents the health of an economy on a huge basis.

### 4. Question 4

#### 4.1 The different effects on output of demand-pull and cost-push inflation

In the economy when the aggregate supply is higher than aggregate demand then the demand, pull inflation. When the aggregate demand increases but the aggregate supply does not increase due to the internal or external factors. That time that demand cost pushes inflation. The demand-pull inflation is much better as compared to the demand cost-push inflation.

#### 4.2 Monetary policy having no effect on output for workers with “rational expectations” regarding rise of wages

An aggregate demand curve increases due to capital technology. The aggregate monetary policy can improve the demand by decreasing the interest rate and engaging in the open market. These effects can reduce the interest rate that helps to borrow the cheaper funded. A lower interest rate is able to provide easily loan able funds, which can affect the aggregate demand.

### 5. Question 5

#### 5.1 Explanation the term “crowding out”

As opined by the author Iona, C.A (2018) He term crowding out which is a theory of economics, which argues the government sector expenses are increasing, or even the cutting the pro\civet sector expenses. In the economy, there are three reasons for the crowding effect which are: in fracture, social welfare and lastly economics. Crowding suggests the government loans can actually enhance the demand. Crowding out effect shows decrease of private investment and private spending when social spending increases in an economy. When government expenses fail to increase the overall demand the higher the higher spending. If the government increases the taxes in the private, sector which reduce the income of firms and consumers. In macroeconomics crowding out affects activity, arise when the government increases its expenses and the capacity of the lower employment rate.

#### 5.2 Five examples of “crowding out” effect

In order to the example of effect of “crowding out” effect in microeconomics which are as follows:

1. As opined by the author Sachs et al. (2019) For example a company, which deals in energy, sources like solar farms and wind energy. In addition, the government sector invests in significant projects for private construction companies, like making solar plants to provide power to the city. It could be called a crowding out effect. Because the private sector company could not survive in the long term in that area.
2. As stated by the authors Farina, O., Jonson and Shapovalenko (2021) For example, a company tries to invest borrowed funds in research and development to enhance the people's living standard and lives. In the initial plan, the company took out the funds worth \$ 10 million with the interest of 6 %. At the same time, interest rates started escalating due to the government investing in several projects and collecting the funds and borrowing. As a result, the demand for loans will increase and the interns. At last, the company decides to not invest in the project.
3. As expressed by the author Begun and Angola (2019) In order to affect financial crowding, if the government increases the expenses and they require funds from all sectors, this move of the government will increase the demands of loans and interest rate. The higher rate of interest in the economy for both investment and consumer will fail.
4. As stated by the author Denary and Voigtländer (2018) in income tax purposes when the Doberman tries to increase the tax on both consumers and the private sector. The result of increment of taxes will reduce the discretionary income of both firms and individuals. Finally, the result will be lower spending by the consumers when the government increases the individual taxes.
5. If the private sector and government sector invest at the same time in the same area, it can affect the private sector company to survive, because the government has a good number of funded that can affect the private sector in the long run.

### 6. Question 6

#### 6.1 Discussion of Luca Critique

The American economist Robert Lucas invented the luck critique. It argues that it predicts the effect of changes in economic policy based on observation of historical data. In the luck critique, it discusses the Keynesian model rules. It is important in the history of economic thought. It is a theory of economy in which individuals make decisions based on all information in the market and analyze the latest trend. It also suggests to the people that they will do something wrong.

#### 6.2 The implications of Rational Expectations for the Phillips curve by the help of diagram

As stated by the author Begun and Angola (2019) in the implementation of the rational expansion model in the last few years, lower unemployment will be ineffective. In the economy, the ration expansion could not be stable. The allocation of time between labor and leisure is the biggest problem in the economy. A retinol expansion of wages will take all information, including the effect of government policy. The critics argue that the rational expansion should be based on the proper information. By adapting the rational expression, which allows us to measure the actual variable and expected variable that are not used commonly in macroeconomics.

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### 7. Question 7

#### 7.1 The differences between the hand line fiscal deficit and premier fiscal deficit

As opined by the author Gomes Aliases and Ramadorai (2021) the handle fiscal deficit is the excess expenditure estimates by the government. It shows the need for borrowing by the government for managing her expenditure. Iota shows the not sufficient funds in the government to finance the government department functioning. It helps to realize the net projected net income less than income. It helps to compare the income of the govern\mint and its expenses. Generally, the headliner fiscal deficit analyse as a percentage of “gross domestic product”. The fiscal deficit, it can help to the economy by providing the funds to the individuals that can help them to invest more or purchase.

The prime fiscal deficit is the excess expense by the government over bother tax and non-taxes sources. The prime fiscal deficit helps the government loans to meet the interest payment. It helps to recover the fiscal health of the economy. If an economy has a high level of income relative to current expenses, the p [prime fiscal deficit says that the economy has surplus primary. The prime fiscal deficit is also known as the difference between the current fiscal deficit and the interest paid out on the loans.

#### 7.2 Is it possible for a country to have a headline fiscal deficit and a primary fiscal surplus

It is possible for a country to have a headline and primary fiscal deficit due to changes in government spending and other criteria. It has been evaluated from the findings that fiscal deficit has been involved within the government beyond means and it is good for the economy if the government spends on other infrastructure projects. When a country spends more than its total income is called fiscal deficit on the other side the prime fiscal surplus shoes the government spends less from its total income as taxes including the interest paid on the government loans. As stated by the author Baade and Farsi (2020) sometimes the government spends more funds on infrastructure and better living standards. In addition, at some time the government spends less from its net income. However, at the same time it is not possible to follow both fiscal deficit and primary fiscal surplus as both of these have different characters, objectives, and explanations. By following a fiscal \deficit, the government can enhance the economy by spending its income and can fill the gap between the demand and supply.

### 8. Question 8

#### 8.1 Discuss the factors that shift the IS Curve by the help of diagram

The IS curve shows the combination of investment and savings. It also represents the income and interest and which god is in the market equilibrium. Generally, the IS curve shifts on the left side due to the decrease of government consumption, decrease in the consumer confidence, and increase in the taxesby the government. In the shifting of the IS curve income is not only because it has also included the test and preference of consumers, the competition in the market and the size of the economy. It is clear that the price of goods affects the quality, quantity of demand. It is true that future price expectation can affect the demand and supply. The changes in the demand and supply show the shifting of the curve either left or right. Generally, people buy products more when their income level is high for example the increase of income of people they like to parka\have more or they like to purchase branded products. Whereas the income is decreased, in that case maybe people like to shift to cheap products or they would like to reduce the consumption of products. Changes of price of goods are also a reason for changes of the IS curve. The future price of a product can affect the demand curve, sometimes consumers expect that the price of a product can increase in the future due to any reason. In that case the consumer likes to purchase microproduct and the IS curve will shift to the right. On the other hand, the consumers do not buy the product in that case the demand curve will shift to the left.

### 9. Question 9

#### 9.1 Explanation of LM curve

The LM curve denotes the liquidity and money, which is a combination of real income and the interest rate. It helps to show the short run equilibrium between output and interest rate. The LM curve goes up when the level of income increases in GDP.

#### 9.2 LM curve is derived in a Closed Economy

The LM curve shows the money market equilibrium. In a closed economy the LM, curve analysis by the equilibrium of demand of money and supply. The LM curve lacks realism to be a useful tool for economic policy of economy. It helps to examine the relation between GDP and interest rate. It shows all levels of income and the interest rate. The LM model has limited tools for policy, and it cannot explain the tax and expenses policy how to formulate. The Lm curve has very little information about the inflation rate in an economy.

### 10. Question 10

#### 10.1 Limitations of the IS-LM Model

In order to discuss the disadvantages of the IS LM curve, in the current economy. It has two main limitations, which are: it has a comparative static equilibrium model and it not considers the time log, which is important to measure of the changes in the economics policy. Second, there is no fluctuation in the price model. One of the main problems with the IS LM curve is that it is a static based model, which has no fluctuation. The LM model does not import the behaviour of some variable and hence it is unrealistic in today’s economy. The main problem with the IS LM model is that it does not consider the individual units, it does not have a complete record, it cannot provide the exact result which have no individual approach.

Reference

Journals

Baqaee, D. and Farhi, E., 2020. Supply and demand in disaggregated keynesian economies with an application to the covid-19 crisis (No. w27152). National Bureau of Economic Research.

Bekun, F.V. and Agboola, M.O., 2019. Electricity consumption and economic growth nexus: evidence from Maki cointegration. Engineering Economics, 30(1), pp.14-23.

Demary, M. and Voigtländer, M., 2018. Reasons for the declining real interest rates (No. 47/2018). IW-Report.

Edwards, S., 2019. Modern monetary theory: Cautionary tales from Latin America. Cato J., 39, p.529.

Faryna, O., Jonsson, M. and Shapovalenko, N., 2021. The cost of disinflation in a small open economy vis-à-vis a closed economy.

Gomes, F., Haliassos, M. and Ramadorai, T., 2021. Household finance. Journal of Economic Literature, 59(3), pp.919-1000.

Guerrieri, V., Lorenzoni, G., Straub, L. and Werning, I., 2020. Macroeconomic implications of COVID-19: Can negative supply shocks cause demand shortages? (No. w26918). National Bureau of Economic Research.

Ioan, C.A., 2018. An unified consumption and production model for a closed economy.

Müller, S. and Rau, H.A., 2020. Motivational crowding out effects in charitable giving: Experimental evidence. Journal of Economic Psychology, 76, p.102210.

Mwankemwa, L.P. and Luvanda, E., 2022. Fiscal Deficit and its Threshold Effects on Inflation in Tanzania. African Journal of Economic Review, 10(1), pp.191-208.

Nguyen, N.B., 2018. The transition process of Vietnam’s trade policy from closed economy to “servicification” economy. Studia i Prace WNEiZ US, (53/2), pp.295-310.

Nyangarika, A.M., 2018. Correlation of oil prices and gross domestic product in oil producing countries.

Sachs, J.D., Woo, W.T., Yoshino, N. and Taghizadeh-Hesary, F., 2019. Importance of green finance for achieving sustainable development goals and energy security. In Handbook of Green Finance (pp. 3-12). Springer, Singapore.

Sui, J., 2020. Effects of fiscal devaluation in a closed economy.

Website

Economicshelp.org (2022) Crowding out. Available at: https://www.economicshelp.org/blog/25079/concepts/rational-expectations/ [Accessed on 11/05/2022]

Wikipedia.org (2022) Crowding out. Available at: https://en.wikipedia.org/wiki/IS%E2%80%93LM_model [Accessed on 11/05/2022]

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