C11E MACROECONOMICS 6
Macroeconomicanalysis usually describes an economy using three variables. Theseare the gross domestic product, inflation, and the rate ofunemployment. First macroeconomic analysis can be used in evaluatingand assessing development performance alongside the growth of theeconomy (Bokan,Gerali, Gomes, Jacquinot, & Pisani, 2015). Expanding productionis examined on whether it will be welcomed by the market forces.Suitable growth is the goal of any policymakers, but this is notalways attainable. The economy always undergoes periods of economicgrowth and slowdown (recession). Macroeconomic analysis is usuallyinterested in examining economic fluctuations with the aim ofattaining the best returns to the economy.
Thegreat depression in the United States is a good example wheremacroeconomic analysis was applied. The validity of the classicaleconomists was majorly questioned. They argued that factor supplyalongside technology was a key reason in determining the level ofnational income (Bokan et al., 2015). The argument did not work inthe depression as technology and factors of production remained thesame though there was an economic recession. Keynes came in to assistand revolutionize the traditional classical analysis theory insolving the depression. His works are still being applied in today.He asserted aggregate demand variations in the short run, which actas the determinant of the national income as opposed to total supply.
Second,it can be used by consumers in determining the employmentopportunities, the cost of purchasing products in the market and thecost of borrowing money. Unemployment rate informs macroeconomiststhe number of people that are seeking work but are unable to find jobopportunities. For example, the IS-LM analysis can be used in theexamining of the levels on interest rates in the economy. Investmentopportunities are available. Aggregate demand and the purchasingpower of the consumers can drive which is very vital to the firmowners. The analysis will always aim at establishing equilibriumbetween the level of the output and that of the interest rates.
In1980s Bolivia suffered from increased interest rates. Jeffrey ofHarvard offered them the best advice. They deployed a stabilizationof a conservative nature, that is, the balancing of the fiscalbudget, the growth of money to be cut alongside policies of themarket. An instant fall in the level of the rate of inflation waswitnessed as expected from the argument of the classical economists.The output also declined as projected by the Keynesian theory in theshort run.
Thirdly,the government employs macroeconomic analysis to plan and budget forits resources, tax collection, determining the levels of interestrates and making decisions of policy nature. For example, subsequenttransition to free economy, former governments of Soviet republicscame to realization to gain the level of wobbly internationaleconomic edict. The particular financial success can be highlyrealized through sound economic policies assessed on the basis ofmacroeconomic analysis. It was applied on the addition to theattractive supply and demand law that used to describe and explainmechanism of economic nature that were sensitive to phenomena ofinternal and external economies (Doepke, Hazan, & Maoz,2015).They came up with several mathematical models to explain the multiplelinks amid social and economic factors. Basing on the models, properproblem control techniques were developed in the realization the mostdesirable regimes of the economy. Macroeconomic analysis ofparametric control gives a mathematic approach to solvingmacroeconomic problems.
Inmy maintenance of a small business over the summer, there are severalexpectations I should get in trying to add more workers at constantcapital equipment, to the level of the output. There will be ageneral expectation of the output of yards I maintain to increase ina day with the growing workforce.
First,there will be a drastic improvement of the yards I maintain on thedaily basis as the effective rate will be high. The graph ofproductivity and efficiency will be rising. At this first phase, eachadditional worker adds richness to the process. For every otheremployee, there is a unit of capital that he is assigned. The laborproductivity is expanding at this stage as each workforce is beingutilized.
Atthe second face, there will be an increase in productivity though ata decreasing rate. The setbacks will start getting into themaintenance process due to the fixed capital. For every additionalworker, there will be a limited number of units of capital that he issupposed to be assigned.
Atthe last stage, as more workers are employed in the process, therewill be a decrease in the output level of the maintenance process. Atthis phase, wastage will set in as for every additional worker. Therewill be idleness as the labor units are fully occupied. It can besupported by the Chinese firms that used to hire more workers, theexhibited this trend of behavior. Also in sub-Sahara, the above plotwas seen.
Areal business cycle is usually established in an economy that is insteady state in the presence of both the enduring technological shockand dynamic exogenous variable. It leads in the upsurge ofproductivity. Initial improvement in technology and its subsequentpositive shift the production, with a set capital stock, there is anincrease in the output (Simpson,2014). Due to this, the resources will also increase. As a result,both the accumulation of capital and current consumption expands. Inthe long run, steady decline in consumption and investment will setin. At this point the output will be increasing at decreasing rate todrive the economy to a stable state.
Inthe case where there is less return on labor preceding technologicalshock. Workers will tend to work less than expected. Most of theleisure time will be substituted for the period of productivity. Also, the technological shocks will affect the level of output. Withthe decreased working hours, the demand for goods will also reduce.Financial frictions will proceed from the reduced level of the ratesfor the products. The occurrence of loan losses will also affectfuture amounts of loanable funds.
Governmentestablishes itself in an effort of enhancing living standards of itspeople by reducing technological cost. The private sector should besubsidized in measures through patent rights and tax credits. Itincreases private investment based on modern technology. Thegovernment should support innovation. Fresh ways of increasingproductivity, leads to a large extend in technology progress.
Bokan,N., Gerali, A., Gomes, S., Jacquinot, P., & Pisani, M. (2015).EAGLE-FLI A model for the macroeconomic analysis of banking sectorand financial frictions in the euro area.
Doepke,M., Hazan, & Maoz, Y. D. (2015). The baby boom, World War II: Amacroeconomic analysis. The Review of Economic Studies, rdv010.
Simpson,B. P. (2014). Real Business Cycle Theory. In Money, Banking, and theBusiness Cycle (pp. 79-110). Palgrave Macmillan US.