Business Macro Economics
QUESTION # 1:
When the income of the household is not used for consuming goods or repayment of taxes than that amount is called as savings. When the households increase their savings the goods consumed by them decrease in quantity than the goods that are produced. This increase in saving reduces the consumption of the goods produced by the firm. This in turn makes the firms to reduce their prices or reduce the supply of goods. This unexpected decline will impact on the circular flow of income (Froyen, 2009).
B. Drastic Spending Cuts Are Implemented By the Government
The government can impact the circular flow of income in three ways. One is the purchase of goods method, second is taxes and third is the influence of the government on the money stock. The drastic spending cut by the government will impact on the circular flow of income dramatically. A reduction in the purchases that are made by the government will lead to an inventory buildup for that particular firm. As the inventories pile up the firm will react by either reducing the prices or cut back the output. This unexpected fall in the prices will reduce the volume of good in the circular flow of goods in the real and nominal terms. This same philosophy applies on taxes and on money stocks (Froyen, 2009).
QUESTION # 2:
ECONOMIC SYSTEMS
The economic systems that have been discussed in the online book are Communism, Capitalism and Mixed Economy. All the systems are significantly important in describing the systems of the society (Gartner, 2009).
Communism is the system which is completely dominated by the governmental decisions (Leamer, 2009).
Capitalism or free market economy is the system which is entrepreneurial owned and the government has very little right for intervention (Leamer, 2009).
Mixed economy is formed by combining the traits of both Communist and Capitalist systems. In the mixed economy most of the major functions are run by private organization and the government only possesses the right to intervene and regulate to safeguard the rights of the consumers (Gartner, 2009).
The US economy can be classified as a Mixed economy. This is because it comprises of mostly private businesses which are intervened by the state to safeguard the rights of the consumers. The US economic system has been developed remarkably. The system is operating in an efficient way. In a capitalist system there is always threat that the entrepreneurs may set higher prices and exploit the customers. The intervention of government in the Mixed economy ensures that the consumers are not exploited by over pricing.
QUESTION # 3:
Keynes and Hayek proposed solutions to the governments by the efficient use of monetary and fiscal policy. Both the economists made propositions. The preference of both the economist was that the market should best serve the common good and hence the intervention of the state was primarily important. Keynes proposed that the flaw in the market was because of the monetary systems which allowed extra consumption (Williamson, 2008).
The policies on which both Keynes and Hayek advocated were (Williamson, 2008):
- Hayek proposed that excess cash must not be part of the system and he opposed holding of excess cash.
- Keynesian suggested that larger states must be promoted through public private mutual understanding.
- Keynesian policies were blamed for the rising inflation of 1970.
- Keynes advocated deficit financing.
- The policy of Keynes favored unnecessary loans.
Keynes and Hayek both made propositions to the federal government that the circular flow of income must be balanced and economic measures must be taken to ensure that. Both proposed methods to ensure that the flow of money in the system was maintained.
The major differences in the theories of both were that Keynes proposed that full employment was possible and could be achieved which is impossible to be assumed. Hayek proposed that relation maintained between production and consumption was indirect whereas Keynes suggested the opposite. These were the major differences in the two practices (Williamson, 2008).
QUESTION # 4:
Solutions for the economic flaws are suggested by economists to the government. Both the economists Keynes and Hayek have their own significance and contributions to the system. I agree with Keynes because the propositions given are more practically applicable and have been used frequently. A few of his contributions can be contradicted but his theories are appropriate. His proposition that money should not leave the circular flow of income is correct. If people save and investors invest then the cycle of the economy won’t be affected. This can be done by ensuring that people save less and buy more in the times of recession. Saving at the time of recession affects the economy fatally as there is no one to buy the produced goods (Brickley and Zimmerman, 2009).
The argument of Keynes regarding full employment can be contradicted because it is impossible for an economy to offer full employment. The Keynes model is also effective because it has identified many flaws in the capitalistic economic system. I support the Keynesian school of thought because the model justifies its application and the major factors which determine the functions of the society (Williamson, 2008).
REFERENCES
Brickley, S., and Zimmerman, J. (2009). Managerial Economics and Organizational Architecture. Boston: McGraw Hill
Froyen, R. (2009). Macroeconomics: Theories and Policies, (ninth edition). New York: Pearson
Gartner, M. (2009). Macroeconomics, 3rd edition. Harlow: FT Prentice Hall
Leamer, E. (2009). Macroeconomic Patterns and Stories. Heidelberg: Springer-Verlag Berlin Heidelberg.
Williamson, S. (2008). Macroeconomics: Third Edition. Pearson, Canada
