Free Essay About Fundamentals Of Macreconomics

Let us analyze a few economic activities in the light of macroeconomic principles.

Purchasing of Groceries: The purchase of groceries is a part of consumption expenditure. If the purchase increases, the demand for grocery products will increase that will increase its price. The businessmen dealing with groceries will increase their production and this will further increase employment in this sector. If groceries are a major item in the consumption basket the increased purchase of groceries will have a positive impact on the economy as a whole. The profit of the businesses involved in groceries will rise. The income of the employees will also increase. The increased income will further increase the consumption expenditure thereby increasing output, employment and income. The fiscal burden on the government is also reduced. If the purchase of groceries falls then just the opposite will happen. The income and employment will fall. Thus we see that consumption expenditure is a strong element of aggregate demand that has a significant impact on the economy. The recent fall in the consumption expenditure in Japan bears testimony to this fact. The fall was in effect of a rise in the sales tax. The consumption expenditure fell to such an extent that the already receding economy fell further into the clutches of recession.
Massive layoff of employees: Massive layoff will lead to a significant level of unemployment in the economy. The effect will be far reaching. The layoff will mean fall in income for a large portion of the population. Their purchasing power will be reduced. This will mean a fall in the consumption expenditure. The fall in consumption expenditure will reduce the aggregate demand thereby depressing the prices. The fall in prices will be a disincentive for the producers. So production will fall. This will further reduce income and employment. The economy will face a recessionary situation. The government will have to intervene to introduce fiscal and monetary measures to revive the economy. In the recession of 2008 we have seen gross laying-off of workers by the firms who were facing falling profits. The government had to intervene through fiscal measures to revive the economy.
Decrease in taxes: A fall in the tax rates increases aggregate demand by two ways. The households facing lower tax rates increases their purchases thereby increasing consumption expenditure, which increases aggregate demand. The businesses facing lower taxes will be induced to expand their businesses as their profits will be higher. So investment increases. The demand for capital goods increases thereby increasing aggregate demand. The income and employment in the economy increases. But the reduction in taxes will tend to reduce the revenue for the government. This may increase the fiscal deficit. If the economy expands to a large extent the revenue may increase in spite of the fall in taxes. In recent times we have seen the economy of the USA revive from a recession through the reduction in taxes. The reduced tax rates had increased the deficit. Now that the US economy is on a steady growth path the fiscal stimulus has been withdrawn and taxes have been increased so that the government can recover the deficits. Recently the government of China has taken steps to reduce taxes to save the economy from the threat of a recession.

Works Cited

Branson, W. H. (1989). Macroeconomic Theory and Policy. McGraw Hill.
Levacic, R., & Rebbman, A. (1982). Macroeconomics: An introduction to Keynesian-neoclassical Controversies. Macmillan.
Mankiw, G. (2013). Macroeconimcs. Macmillan.