Macroeconomics Essay Example | Topics and Well Written Essays - 1500 words - 2

Macroeconomics - Essay Example It is computed as the difference between exports and imports. GDP is flawed for the following reasons: "it does not include the value of non-market production and leisure; it contains intermediate and regrettable expenditures that do not contribute to economic welfare; government expenditure on health, education, social services and environmental protection does not necessarily reflect outcomes in these areas; it does not account for resources required for sustainable development; and it does not directly measure investment in social capital." 3. What is fiscal policy Using the income expenditure model, explain the effect of an increase in government spending on real output. What factors or possible problems should a government bear in mind when devising an expansionary fiscal policy Fiscal policy aims to correct the economy by increasing or decreasing tax levels and public spending. For example, if the economy is down and the government wishes to fuel the economy, it will reduce tax levels. This will give consumers more disposable income and encourage spending. With the increase in demand, businesses will then turn to higher production. It can be seen that in fiscal policy, the sensitivity of interest rate is not significant for the policy to be effective. In this type of macroeconomic tool, the economy is corrected without influencing the level of interest rate in the economy. The policy directly targets consumer spending and business production. However, economists should also take into account that any increase in government spending (a fiscal policy) will have a tendency in raising interest rates, causing private investment and net exports to fall. This is known as the crowding out effect. 4. Give short definitions of both the IS and LM curves and briefly explain how this model can help economists understand the interaction between the goods and money markets. Show how the IS and LM curves can be derived and explain how equilibrium is reached. The IS curve shows the combinations of interest rates and the aggregate output for which the goods market is in equilibrium, while the LM curve gives out combinations for which the money market is in equilibrium. The IS curve is the downward sloping schedule which shows the equilibrium in the goods market. The slope of the IS curve denotes the interest elasticity of investment demand and the marginal propensity to save. The LM