ASSIGNMENT 1

Maria Agha-24999
Q1)

In macroeconomics, long-run growth is the increase in the market value of goods over a period of time. The long-run
growth is inferred by change in GDP.

For an economy to undergo positive long-run growth its outputs and inputs must be in balance for an increase to
occur in supply, demand, revenue, and employment. The long-run economic growth is deduced by short-run
economic rulings.

Government activity impacts long-run growth in following ways,

Investment:

the government can promote economic growth by capitalizing in the economy. Examples of stimulations include
financing in market production, infrastructure, education etc. This is especially important when much growth ensues.
The government must accelerate economic growth to meet the requirements of a rising population.

Monetary policy:

the government authorizes monetary policies to keep the growth rate of money steady. This helps to monitor excess
inflation and surplus short-term growth, both of which can negatively influence long-run growth. The fiscal system
can also impact on the level of inflation within an economy.

Fiscal Policy:

Choices in tax structure, government spending and economic regulation can all impact long-run growth by affecting
the choices that businesses and individuals make.

Q2)

Economic fluctuation or instabilities are simply variations in the level of the national income of a country depicting
growth or reduction. A market economy is not fixed It's dynamic. An increase in national income implies that an
economy is growing, while a deterioration in national income suggests that an economy is contracting.

Every nation's economy fluctuates between intervals of growth and contraction. These alterations are caused by
levels of employment, productivity, and the total demand for and supply of the nation's goods and services. In the
short-run, these fluctuations lead to periods of proliferation and recession.

Q3)

Inflation can be caused by multiple factors with demand-pull and cost-push inflation among the most familiar.

1. Demand-pull inflation:

Demand-pull inflation occurs when the need for certain goods and services is greater than the economy's ability to
meet those demands. When this demand outpaces supply, there's an upward tension on prices — causing inflation.

2. Cost-push inflation:

Cost-push inflation is the rise in prices when the expense of wages and materials increase. These expenses are often
passed down to customers in the form of increased rates for those goods.

3. Increased money supply:

If the money supply upswings faster than the rate of output, this could result in inflation, especially demand-pull
inflation because there will be several dollars chasing limited products.

4. Devaluation:

Devaluation is downward adjustment in a country's exchange rate, resulting in lower values for a country's assets.

Q4)

Unemployment is a phrase relating to individuals who are employable and energetically seeking a job but are
incapable to find one.

 Unemployment is provoked by various reasons that arrive from both the demand aspect, or employer, and
the supply aspect, or the worker.
 Demand-side deductions may be affected by elevated interest rates, global recession, and economical
hardships. From the supply side, frictional unemployment and structural employment play a big part.
 Unemployment boosts progressively with decreased educational levels; and the education technique is not
generating the skills for the labour market.
 Labour demand - supply mismatch: Labour supply is influenced by the rise in the number of job seekers over
the years.
 Greater wage demands may lead to decrease in new employment

Unemployment results in curtailed market, consumption, and purchasing ability, which in turn causes decline in
profits for businesses and leads to budget cuts and workforce reductions. It develops a cycle that goes on and on
that is difficult to reverse without some type of intervention.

Q5)

Globalization of product and financial markets refers to an increased economic integration in specialization and
economies of scale, which will result in greater trade in financial services through both capital flows and cross-border
entry activity.

Beneficial Effects:

Some economists have a positive attitude towards the net outcomes of globalization on economic development.

 Trade among nations through the use of comparative advantage promotes growth, which is associated to a
strong correlation between the exposure to trade flows and the impact on economic growth and economic
performance. Moreover, there is a strong positive relation between capital flows and their impact on
economic growth.
 Foreign Direct Investment's impact on economic growth has had a favorable growth effect in rich countries
and a rise in trade and FDI, resulting in higher Further evidence suggests that there is a positive growth-
effect in countries that are adequately rich, as are most of the developed nations.
 One of the possible benefits of globalization is to provide opportunities and alternatives for curtailing
macroeconomic volatility on output and consumption via diversification of risk.

Harmful Effects:

Non-economists and the wide public expect the costs related with globalization to outweigh the benefits,
particularly in the short-run. Less well-off countries from those among the industrialized nations may not have the
same highly-accentuated effective effect from globalization as more rich countries, measured by GDP per capita.
Although free trade increases chances for multinational trade, it also rises the risk of failure for smaller firms that
cannot compete globally. Additionally, free trade may drive up production and labor costs, including higher earnings
for a more skilled crew, which then can lead to outsourcing jobs from countries with outstanding wages.
Q6)

Government policies to increase economic growth are concentrated on attempting to improve aggregate demand
(demand side policies) or expand aggregate supply/productivity (supply side policies)

The policies the government can employ to influence economic growth and inflation are,

Fiscal policy:

Changing government spending and taxation to affect aggregate demand. To increase aggregate demand in the
economy (and thus economic growth) the government may increase government spending and lower tax. If the
government wants to decrease aggregate demand, they may decrease government spending and increase taxation.

Demand side policies:

It aims to increase aggregate demand (AD). This needs to be done during a recession or a period of below-trend
growth. If there is spare capacity (negative output gap) then demand-side policies can play a role in increasing the
rate of economic growth. However, if the economy is already close to full capacity (trend rate of growth) a further
increase in aggregate demand will mainly cause inflation.

Monetary policy:

It is the most common tool for influencing economic activity. To boost AD, the Central Bank (or government) can cut
interest rates. Lower interest rates reduce the cost of borrowing, encouraging investment and consumer spending.
Lower interest rates also reduce the incentive to save, making spending more attractive instead. Lower interest rates
will also reduce mortgage interest payments, increasing disposable income for consumers.