macroeconomics assignment sample

Assignment

Exploring Macroeconomics

Type of Documents : Assignment

No of Words : 2,500 Disclaimer: This is a sample document prepared by AssignmentDesk.co.uk and has been submitted on turnitin. To order the similar paper please contact at:

Email: [email protected]

Phone: (UK) +44 203 3555 345 Website: www.assignmentdesk.co.uk

2 Email : [email protected], Phone: (UK) +44 203 3555345

Website: www.assignmentdesk.co.uk

This is a sample document owned by www.assignmentdesk.co.uk

EXPLORING MACROECONOMICS

http://www.assignmentdesk.co.uk/




Table of Contents

Table of Figures .........................................................................................................................4

Introduction.................................................................................................................................1

Question: 1, the UK Recession...................................................................................................1

Solution.......................................................................................................................................1

Question: 2, Expansion of the US macro Economy ...................................................................5

Solution.......................................................................................................................................9

References...................................................................................................................................13





Table of Figures

Figure 1 Relationship between Aggregate consumption expenditure and aggregate disposable

income........................................................................................................................................2

Figure 3 EYQ Graph..................................................................................................................4

Figure 4 Shifted EYQ Curve......................................................................................................5

Figure 5 Keynesian Cross Model...............................................................................................7

Figure 6 Equilibrium Curve.......................................................................................................7

Figure 7 Keynesian cross model at equilibrium (Intermediate Macroeconomics, 2012)..........7

Figure 8 Quantitative Easing Curve...........................................................................................8

Figure 10 Quantitative Easing Curve.........................................................................................9

Figure 11 Long run Phillips Curve ............................................................................................9


income....................................................................................................................10





INTRODUCTION

With the collapse of US mortgage market due to sub-prime lending, the global financial system

is completely shattered. The UK financial markets were also not able to resist to this economy

fall-down. The combination of credit crunch and falling housing market resulted in a recession in the

UK market (Richardson, 2011). Recession can be defined as fall in real GDP of a country. Alternatively, it

can be defined as, for the two consecutive quarters, if economic growth shows negative trend; i.e. if there

is a fall in the real output of the country for consecutively six months (King and Cushman,

1997).

Question: 1, The UK Recession

Apply an appropriate theoretical framework to analyse how falling house prices and tighter consumer

credit conditions in the UK may cause the UK macro-economy to go into recession.

Solution:

The main reasons for the recession (2008-09) in UK are:

• Falling house prices – credit crunch and shortage of mortgage

• Credit crunch – shortage of finance

• People lost confidence in the financial sector which resulted in loss of confidence in the real economy

• Cost push inflation resulted in lowering the disposable income

The main factors that resulted in the recession of the UK economy were falling house prices and tighter

consumer credit. In order to analyse that how tighter consumer credit and falling prices of house impact

the economy of UK, we will apply Keynesian cross model (Economics Help, n.d).

Keynesian Cross Model is an important tool for understanding the macro-economic and the factors that

can impact the macro economics condition in negative ways. The most important outcome of Keynesian

Model was that, it tells that volume of national expenditure helps in determining the level of national

income and national product. Basically Keynesian Cross Model emphasised on the concept of national

expenditure and its components. Further, it tells that due to change in national expenditure, the aggregate

income and the output of the country changes (Benassy, 2011).

According to Keynesian cross model, two main components of National Expenditure are:

• Aggregate private investment spending by firms, and

• Aggregate private consumption expenditure by households

As in every economy, business sector generates revenue by sale of its goods and services, and

the sales of the goods and services happen when the consumers of the household sector purchase

them.






income

The above diagram shows the relation between aggregate consumption expenditure on the Y axis and

aggregate disposable income on the X axis. This relation is referred to consumption function (CF).

Using the concept of consumption function we will try to understand the impact of falling prices

of house and tighter consumer credit on the UK economy.

According to the diagram,

C = a + c Yd

Where, C = aggregate private consumption expenditure

Yd = aggregate disposable income, and

c = community’s marginal propensity to consumer

So, if there will be no tax imposed by the government, the aggregate disposable income will

become equal to the national income. i.e., C = a + cY





This is a sample Assignment for complete

project contact

Call now: +44 203 3555 345

Email Address: [email protected]


mailto:[email protected]




is rise in rate of interest, the consumption income will definitely fall. In the above diagram, the

consumption function shifts to CF2 from CF0 due to the above changes, while the marginal

propensity to consumer (c) remains stable.

Similarly, banks are coming with many schemes such as Equity Release Scheme and Cash Reversion Plan

that helps in financing the consumption. According to such schemes, the owner of the house can access

the finance to meet the consumption spending by keeping the asset as collateral. This has benefited the

owner in two ways; firstly, he will remain the owner of the house and secondly, he can access the

financial services of the financial institutes by keeping the asset as collateral. But in the present case of

falling in house price and tighter consumer credit, the consumers will find it difficult to keep the asset as

security, and will not get easy access to the finance so as to meet their expenses. So it will be difficult for

the owner to get the finance, to meet the consumption spending. So by this the consumption spending

will decline and will result in fall in national expenditure (Samuelson, 2010).

With the rise in interest rates, households with excess of money will enjoy higher income as

compared to the borrowers. But in the present economic scenario, borrowers are in excess as compared to

the net savers, so the combined impact of the rise in interest rate will negatively affect the consumption

spending and will result in lowering the consumption expenditure.

Figure 2 EYQ Graph





The above diagram shows the level of national income (Y), national expenditure (E) and national product (Q),

which are always equal. When the prices of house remain same, the aggregate demand will intersect at 45

degree. This situation is called macro-economic equilibrium position (Macroeconomics Tutorials, n.d).

Figure 3 Shifted EYQ Curve

With the decline in the prises of house and tighter consumer credit will result in reduction of many

for expenditure. The above diagram shows the change by shifting the curve from AD0 to AD1. Hence

the equilibrium position shifts to F1 from F0. Hence the fall in prices of house will reduce the aggregate

demand and thus will result in fall in national product and national income (Macroeconomics Tutorials,

n.d).So by applying the Keynesian Cross Model, we have tried to explain that, the fall in house prices and

tighter consumer credit has resulted in the recession of the UK macro economy.

Question: 2, Expansion of the US macro Economy

Apply the Keynesian Cross model to analyse how rising consumer credit can stimulate an expansion

of the US macro economy. Carefully specify the starting position of your analysis in order to evaluate the

possible outcomes.






project contact

Call now: +44 203 3555 345







Figure 4 Keynesian Cross Model

The other graph which shows the equilibrium condition is shown below:

Figure 6 Keynesian cross model at equilibrium (Intermediate Macroeconomics, 2012).






project contact

Call now: +44 203 3555 345







References

Barnes, R., n.d. Economic Indicators: Consumer Credit Report . [Online] Available through:<

http://www.investopedia.com/university/releases/consumercreditreport.asp#axzz2FfJHK1jk>

[Accessed on 20th December 2012].

Benassy, J. P., 2011. Macroeconomics Theory. New York: Oxford University Press.

Bridges, J. and Thomas, R., 2012. The impact of QE on the UK economy — some supportive

monetarist arithmetic. [pdf] Available

through:<http://www.bankofengland.co.uk/publications/Documents/workingpapers/wp442.pdf

[Accessed on 20th December 2012].

Economics Help. n.d. Causes of Recessions. [Online] Available

through:http://www.economicshelp.org/macroeconomics/economic-growth/cause-recession2.html

>[Accessed on 20th December 2012].


macroeconomics assignment sample

Economy & Finance

table of figures figure

sample document

equilibrium curve

quantitative easing

uk recession

aggregate disposable

shifted eyq curve

keynesian cross model