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PRINCIPLES OF MACROECONOMICS
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PAGE
1.0
Contents
2.0
Introduction
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3.0
3-15
4.0
Summarization
16-17
5.0
References
18
6.0
Coursework
19-22
2.0 Introduction
In general, economics is the study of how agents (people, firms, nations) use
scarce resources to satisfy unlimited wants. Macroeconomics is the branch of
economics that concerns itself with market systems that operate on a large scale.
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While the term "macroeconomics" is not all that old (going back to Ragnar Frisch
in 1933) many of the core concepts in macroeconomics have been the focus of
study for much longer. Topics like unemployment, prices, growth and trade have
concerned economists almost from the very beginning of the discipline, though
their study has become much more focused and specialized through the 1990s and
2000s.
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Confusion and Uncertainty are one of the costs of inflation. When inflation is high
people are uncertain what to spend their money on. Also, when inflation is high
firms may be less willing to invest because they are uncertain about future profits
and costs. This uncertainty and confusion can lead to lower rates of economic
growth over the long term.
In addition, Menu Costs is also one of the costs of inflation. This is the cost of
changing price lists. When inflation is high, prices need changing frequently which
incurs a cost. However, modern technology has helped to reduce this cost.
Furthermore, Shoe leather costs help to save on losing interest in a bank people
which hold less cash and make more trips to the bank.
Moreover, Income redistribution made borrowers better off and lenders worse off.
Inflation reduces the value of savings, especially if the saving is not index linked.
However it does depends on the real rate of interest. e.g. if a saver gets a higher
rate of interest than the inflation rate he will not lose out. Next, Boom and Bust
Economic Cycles show high inflationary growth which is unsustainable and is
usually followed by a recession. By keeping inflation low it enables a long period
of economic growth. E.g. in the UK, low inflation helped economic growth to be
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inflation rate (i.e., when inflation declines to lower levels).[2] Inflation reduces the
real value of money over time; conversely, deflation increases the real value of
money the currency of a national or regional economy. This allows one to buy
more goods with the same amount of money over time.
Deflation may have any of the following impacts on an economy. Firstly, it will
reduce Business Revenues. Businesses must significantly reduce the prices of their
products in order to stay competitive. Obviously, as they reduce their prices, their
revenues start to drop. Business revenues frequently fall and recover, but
deflationary cycles tend to repeat themselves multiple times. Unfortunately, this
means businesses will need to increasingly cut their prices as the period of
deflation continues. Although these businesses operate with improved production
efficiency, their profit margins will eventually drop, as savings from material costs
are offset by reduced revenues.
Besides, Wage Cutbacks and Layoffs will occur. When revenues start to drop,
companies need to find ways to reduce their expenses to meet their bottom line.
They can make these cuts by reducing wages and cutting positions.
Understandably, this exacerbates the cycle of inflation, as more would-be
consumers have less to spend.
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reasons. First of all, as assets such as houses decline in value, customers cannot
back their debt with the same collateral. In the event a borrower is unable to make
their debt obligations, the lenders will be unable to recover their full investment
through foreclosures or property seizures.Also, lenders realize the financial
position of borrowers is more likely to change as employers start cutting their
workforce. Central banks will try to reduce interest rates to encourage customers to
borrow and spend more, but many of them will still not be eligible for loans.
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payment. Any kind of object or secure verifiable record that fulfills these functions
can be considered money.
Money is historically an emergent market phenomenon establishing a commodity
money, but nearly all contemporary money systems are based on fiat money. Fiat
money, like any check or note of debt, is without intrinsic use value as a physical
commodity. It derives its value by being declared by a government to be legal
tender; that is, it must be accepted as a form of payment within the boundaries of
the country, for "all debts, public and private"[citation needed]. Such laws in
practice cause fiat money to acquire the value of any of the goods and services that
it may be traded for within the nation that issues it.
The importance of money can be judged from the powerful influence which it
exercises on the Volume of production; Direction of production; Pattern of
consumption; Method of distribution; Direction and volume of exchange; and
Rate of saving and mi investment in the country.
First of all, one of the important is Production Decisions. Production has been
greatly facilitated by the introduction of money. Money makes possible the
accumulation of wealth in those hands which are able to organize the production.
The captain of the industry hires the various factors ' of production in order to
meet the future demand for goods and services and pays them in terms of money If
the reward was to be paid in commodity, then the exchange of goods would have
been very limited and so the production on a small scale Production without the
use of money cannot be organized on a large scale and run efficiently and
economically. The decision of what, where, when and how much to produce are all
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guided by the amount of money offered in exchange of goods and service. The
cost of production is also estimated in terms of money. The profit or loss which is
the difference between the sales proceeds and the total money cost is also
expressed in terms of money with the introduction of money. The consumption can
be easily postponed and the assets can be stored for use to a future date.
Besides, it will be Exchange Transactions in a moneyless economy, exchange of
goods was a very inconvenient process. People used to face the difficulties of
double coincidence of wants. There was also no common measure of value. The
use of money has successfully removed the awkwardness of barter. Money, by
acting as a medium of exchange, has greatly stimulated the exchange of goods. It
splits up exchange process into two parts, sale and purchase and thus facilitates
flow of goods and services from producers to consumers.
In addition, Distribution of National Dividend is the four factors of production,
combining %y together, produce a net aggregate of commodities every year. The
share of each factor of production i.e., rent of land, wages of labor, interest on
capital and profit to entrepreneur is paid in terms of money, if the share of each
factor of production was to be paid by dividing joint products, it would have
caused much inconvenience to each distributor. Imagine, a cloth producer paying
the share of each factor of production in term of Cloth. As money is generally
acceptable as a medium of "exchange and at the same time acts as a measure and a
store of value, therefore, the distribution of national dividend through the medium
of money greatly facilitates the processes of distribution. In the words of Jevon
"Money subdivides and distributes properly and lubricates the activities of
exchange.
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Furthermore, Money in the Field of Public Finance show that money renders a
very valuable service in the field of public finance. Public Finance in recent times
aims at increasing the rate of economic activities and reducing inequalities of
income. It also acts as an instrument of economic and social justice in a country.
Money helps the state in the achievement of these objectives. The government can
easily raise revenue through the medium of money and can spend it for the
betterment of the people.
Moreover, Money is in the Sphere of Banking: We know it very well that money
serves as standard of deferred payments. The general confidence in the purchasing
power of money makes it the chief farm of credit. The debtor can safely borrow
money for consumption or for production purposes. This has led to the building up
of a gigantic superstructure of banking and credit system. Attainment of High
Level of Production and Employment show that the introduction of money in the
economy has facilitated exchange. It has led to high degree of specialization and
interdependence of economic units; If the money is properly managed, it ensures
rising level of productions employment and real income in the
Lastly, one of the important is Country. In case, the delicate instruments is not
properly handled, it leads to decline in the prices, output and job opportunities.
We, thus, find that the behavior of employment, rate of output, level of price and
distribution of national income are all directly related to the monetary forces.
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The price increases that result from the rapid money creation creates a vicious
circle, requiring ever growing amounts of new money creation to fund government
activities. Hence both monetary inflation and price inflation proceed at a rapid
pace. Such rapidly increasing prices cause widespread unwillingness of the local
population to hold the local currency as it rapidly loses its buying power. Instead
they quickly spend any money they receive, which increases the velocity of money
flow; this in turn causes further acceleration in prices.
This results in an imbalance between the supply and demand for the money
(including currency and bank deposits), causing rapid inflation. Very high inflation
rates can result in a loss of confidence in the currency, similar to a bank run.
Usually, the excessive money supply growth results from the government being
either unable or unwilling to fully finance the government budget through taxation
or borrowing, and instead it finances the government budget deficit through the
printing of money.
Governments have sometimes resorted to excessively loose monetary policy, as it
allows a government to devalue its debts and reduce (or avoid) a tax increase.
Inflation is effectively a regressive tax on the users of money,[10] but less overt
than levied taxes and is therefore harder to understand by ordinary citizens.
Inflation can obscure quantitative assessments of the true cost of living, as
published price indices only look at data in retrospect, so may increase only
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The price of gold in Germany, 1 January 1918 30 November 1923. Note that the
vertical scale is logarithmic.
In neo-classical economic theory, hyperinflation is rooted in a deterioration of the
monetary base, that is the confidence that there is a store of value which the
currency will be able to command later. In this model, the perceived risk of
holding currency rises dramatically, and sellers demand increasingly high
premiums to accept the currency. This in turn leads to a greater fear that the
currency will collapse, causing even higher premiums. One example of this is
during periods of warfare, civil war, or intense internal conflict of other kinds:
governments need to do whatever is necessary to continue fighting, since the
alternative is defeat. Expenses cannot be cut significantly since the main outlay is
armaments. Further, a civil war may make it difficult to raise taxes or to collect
existing taxes. While in peacetime the deficit is financed by selling bonds, during a
war it is typically difficult and expensive to borrow, especially if the war is going
poorly for the government in question. The banking authorities, whether central or
not, "monetize" the deficit, printing money to pay for the government's efforts to
survive. The hyperinflation under the Chinese Nationalists from 1939 to 1945 is a
classic example of a government printing money to pay civil war costs. By the
end, currency was flown in over the Himalayas, and then old currency was flown
out to be destroyed.
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4.0 Summarization
Inflation is the rate at which the general level of prices for goods and services is
rising, and, subsequently, purchasing power is falling. Central banks attempt to
stop severe inflation, along with severe deflation, in an attempt to keep the
excessive growth of prices to a minimum
Deflation is a decrease in the general price level of goods and services.[1]
Deflation occurs when the inflation rate falls below 0% (a negative inflation rate).
This should not be confused with disinflation, a slow-down in the inflation rate
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(i.e., when inflation declines to lower levels).[2] Inflation reduces the real value of
money over time; conversely, deflation increases the real value of money the
currency of a national or regional economy. This allows one to buy more goods
with the same amount of money over time.
Furthermore, money is any object or record that is generally accepted as payment
for goods and services and repayment of debts in a given socio-economic context
or country. The main functions of money are distinguished as: a medium of
exchange; a unit of account; a store of value; and, occasionally in the past, a
standard of deferred payment. Any kind of object or secure verifiable record that
fulfills these functions can be considered money.
Moreover, a central bank may introduce new money into the economy (termed
'expansionary monetary policy') by purchasing financial assets or lending money
to financial institutions. Commercial bank lending then multiplies this base money
through fractional reserve banking, which expands the total of broad money (cash
plus demand deposits).
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5.0 Reference
http://www.economicshelp.org/macroeconomics/inflation/costs-inflation/
http://www.investopedia.com/terms/i/inflation.asp
http://en.wikipedia.org/wiki/Deflation#Minor_deflations_in_the_US
http://www.moneycrashers.com/deflation-definition-causes-effects/
http://useconomy.about.com/od/pricing/f/Deflation.htm
http://syedaqa.hubpages.com/hub/THE-ROLE-OF-MONEY
http://syedaqa.hubpages.com/hub/THE-ROLE-OF-MONEY
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6.0 Coursework
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A pure command economy would rely exclusively on a central plan to allocate the
government-owned property resources. But, in reality, even the preeminent
command economythe Soviet Uniontolerated some private ownership and
incorporated some
markets before its collapse in 1992. Recent reforms in Russia and most of the
eastern
European nations have to one degree or another transformed their command
economies to
capitalistic, market-oriented systems. China's reforms have not gone as far, but
they have
greatly reduced the reliance on central planning. Although government ownership
of
resources and capital in China is still extensive, the nation has increasingly relied
on free
markets to organize and coordinate its economy. North Korea and Cuba are the last
prominent remaining examples of largely centrally planned economies. Other
countries
using mainly the command system include Turkmenistan, Laos, Belarus, Libya,
Myanmar, and Iran. Later in this chapter, we will explore the main reasons for the
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general
demise of the command systems.
The Market System
The polar alternative to the command system is the market system, or capitalism.
The
system is characterized by the private ownership of resources and the use of
markets and
prices to coordinate and direct economic activity. Participants act in their own selfinterest. Individuals and businesses seek to achieve their economic goals through
their
own decisions regarding work, consumption, or production. The system ,allows for
the
private ownership of capital, communicates through prices, and coordinates
economic
activity through marketsplaces where buyers and sellers come together. Goods
and
services are produced and resources are supplied by whoever is willing and able to
do so.
The result is competition among independently acting buyers and sellers of each
product and resource. Thus, economic decision making is widely dispersed. Also,
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the high potential monetary rewards create powerful incentives for existing firms
to innovate and entrepreneurs to pioneer new products and processes.
In pure capitalismor laissez-faire capitalismgovernment's role would be
limited to protecting private property and establishing an environment appropriate
to the operation of the market system. The term "laissez-faire" means "let it be,"
that is, keep government from interfering with the economy. The idea is that such
interference will disturb the efficient working of the market system.
But in the capitalism practiced in the United States and most other countries,
government plays a substantial role in the economy. It not only provides the rules
for economic activity but also promotes economic stability and growth, provides
certain goods and services that would otherwise be underproduced or not produced
at all, and modifies the distribution of income. The government, however, is not
the dominant economic force in deciding what to produce, how to produce it, and
who will get it. That force is the market.
Microeconomics
Microeconomics is the part of economics concerned with individual units such as a
person, a household, a firm, or an industry. At this level of analysis, the economist
observes the details of an economic unit, or very small segment of the economy,
under a figurative microscope. In microeconomics we look at decision making by
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