NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Macro Economics
Internal Assignment Applicable for December 2022 Examination

Ans1
Introduction

The circular flow of income economic model is used to illustrate how funds or income are
allocated throughout the many economic sectors. Typically, a basic economy is thought to
consist of just two sectors: houses and businesses. Families are in charge of the resources that
produce and rely on commodities and services (Land, Labor, Capital, and Enterprise).
However, the business sector does create and deliver goods and services to homes.

Leakages
It refers to taking money out of an economy's continuous flow. When businesses and people
set aside some of their earnings, there is leakage from the economy's cyclic flow of revenue.
Leakage or withdrawal is the portion of an economy's income that does not move through the
cyclical flow of income and is therefore unavailable for use in purchasing recent-production
products and services. As a result, it can be claimed that leakages hinder an economy's ability
to generate income.
Injections
It refers to adding more or different revenue streams to the dynamic cycle of an economy.
The cyclical flow of revenue is injected by money that families and corporations borrow from
banking institutions and other outside sources. However, despite having more money, there is
no instant expenditure. Therefore, injections increase the income flow of an economy.
Content and Application
The only two sectors of a simple two-sector economy are households and businesses, where
households provide the factors of production (land, labor, capital, and enterprise) and
companies produce and sell consumer goods and services to households. The Circular Flow
of Money in a Two-Sector Economy assumes that there are no savings, meaning that
households spend all of their income on purchasing products, and businesses use all of their
revenue to pay factors. However, in the actual world, households save some of their factor
income for future needs, and businesses save some of their profits for expansion or other
purposes. For the same purpose, the company also borrows money from financial institutions.
All borrowings and savings go through financial institutions or the market. Financial Markets
are organizations that deal in loanable funds, including banks, insurance companies, etc.
Businesses leverage household savings that have accrued on the financial market for
investment reasons.
We further suppose that there are no exports or imports and that the economy is closed.
Similar to households, which spend all of their income, there is no saving and no investment
by businesses. Both the product market and the factor market are present in such an economy.
According to these hypotheses, households that own the factors of production (land, labor,

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capital, and enterprise) are hired as factor suppliers by the firm sector to produce
commodities and services, and they are compensated financially for providing those services.
These factor incomes for the production factors include rent, wages, interest, and profit that
have been produced during the production process.
The two-sector model shows how money moves between households and firms.
 It describes the cycle by which income is generated during the production process,
distributed among the production elements, and then circulated from households to
businesses through the consumption of goods and services they provide.
 Households are referred to as the consumer sector of the economy, which both
contributes factors of production to businesses and spends money on the goods and
services those businesses generate.
 Firms are the units of production that use factors of production to generate products
and services and compensate households for their use of those factors.
 The inputs needed to produce commodities and services are referred to as factors of
production. Land, labor, capital, and entrepreneurship are a few examples.
 Factor payments are the earnings received by the provider of production-related
inputs in exchange for their services. Take rent, salaries, interest, and profits as
examples.

We can make the following assumptions to simplify our analysis: -

 There are just two economic sectors: households and businesses.
 Only households can supply factor services to firms, and only households can provide
factor services to firms.
 The household spends all of the money it receives from the company for supplying
factor services on consumption.
Conclusion
As a result, we can draw the following conclusion.

 In other words, neither households nor businesses save money from their earnings or
profits. This means that there are no savings in the economy.
 As shown in the accompanying diagram, businesses provide products & services to
households in exchange for consumption spending, while households provide factor
services in exchange for factor payment.
 Total production = Total consumption
 Factor payment = Factor income
 Consumption expenditure = Factor income
 Real flow = Money flow

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Ans2
Introduction
In macroeconomics, the liquidity of money is referred to as LM. When interest rates increase,
the demand for money decreases. LM is a component of the IS-LM model, which stands for
Investment Saving - Liquidity Preference Money Supply. These broad terms are used to
represent money and earnings in an economy. The models are used to find intersection points,
equilibrium, or balance points where the amount of money sought and the amount of money
that is available for investment are equal. Even if the formulas are a little more complex, the
typical supply and demand economic analysis underlies everything.
The LM equation, which determines the demand for money, is shown as follows:
L=kxY-hxI
 L = Demand for Real Money
 k = Income Sensitivity of Demand for Real Money
 Y = Income
 h = Interest Sensitivity of Demand for Real Money
 i = Interest Rate
When we talk about it, we don't mean to compare real money to Monopoly money. On the
other hand, real money is inflation-adjusted. This demonstrates what real money, or more
simply, what money can buy, can do. The desire for money is influenced by income as well.
Your spending and offshore savings increase as your income does. Because people borrow
money to invest, it also depends on the interest rate. The interest rate is subtracted. More
people invest their money as interest rates rise. Indicators that are combined with income and
interest rates and have values greater than zero are the variables k (income sensitivity) and h
(interest-rate sensitivity) (interest sensitivity).
Content and Application
Another name for the IS-LM model is the Hicks-Hansen model. The "IS-LM Model"
demonstrates how interest rates and the asset market are related (also known as actual output
in goods and services and money markets). The amount of money needed decreases as the
interest rate rises. This notion is used to represent money and earnings in an economy. To
find balance or equilibrium points, models are utilized. Alternatively, to establish values
when the required and available investment capital are equal. The studies the models produce
serve as the foundation for macroeconomic policy decisions. The original IS-LM model has a
vertical axis for interest rates and a horizontal axis for total nominal income. The downward-
sloping IS curve illustrates the region where investment, a function of interest rates, and
savings, a function of income, are equal.
On the other hand, the upward-sloping LL curve displays the locations where the money
stock equals the amount necessary to fulfill liquidity preference. The inclusion of "LL" rather
than "LM" in the original diagrams should also be noted. The IS and LM curves make up the
IS-LM graph. GDP, or (Y), is positioned on the horizontal axis and increases to the right. The
vertical axis is made up of the interest rate, I or R). The IS curve represents the set of all
production (GDP) and interest rate levels where total investment (I) equals total saving (S).

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The IS curve slopes downhill and to the right for lower interest rates because higher
investment leads to greater total production (GDP).
The set of all GDP and interest rate levels where the demand for money (liquidity) equals the
supply of money is known as the LM curve. Since of the increased demand for keeping cash
balances for transactions brought on by rising income levels (GDP), the LM curve slopes
upward because a higher interest rate is required to keep the money supply and liquidity
demand in equilibrium. The intersection of the IS and LM curves shows the equilibrium point
of interest rates and output when the money markets and the real economy are in balance. It is
possible to employ more IS and LM curves to represent different situations or moments in
time.
LM Graph
The model is illustrated visually by two intersecting lines. Real gross domestic product, also
known as national income, is represented by the horizontal axis Y. The real interest rate is
shown by the letter I on the vertical axis "X." According to the investment and savings
equilibrium, or IS, overall consumption and output are equal. Net exports, government
purchases, anticipated company investment, and consumer spending are all included in the
overall expenditure. GDP or real income is implied by total output. Every dot represents a
balance between saving and investment. As a result, each interest rate level generates a
specific quantity of projected consumption and fixed investment.

The IS-LM curve represents real income levels and interest rate combinations (when the
money market is in equilibrium). The relationship between the financial system and the
economy is represented by an upward-sloping curve. For a specific income level, each point
on the curve represents a single money market equilibrium position. The IS-LM curve shifts
to the right when the liquidity preference function changes in response to an increase in GDP.

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Modifications to the IS-LM curve are analyzed to forecast an increase in interest rates. The
LM function consequently has a positive slope.
Conclusion
 The equilibrium of the product's market is represented by the IS curve.
 The LM curve depicts the money market's equilibrium.
 The point where the two curves intersect is where both markets are simultaneously in
equilibrium.
 Recession can be monitored by utilizing the IS-LM model and both fiscal and monetary
actions.
Ans3(A)
Introduction
GDP at market prices less net indirect taxes is known as the gross domestic product (GDP) at
factor cost. The GDP at factor cost measures the monetary worth of output generated within a
nation's domestic boundaries in a year as obtained by the production factors. Taxes paid by
the government are not included in the factor cost since they are not directly associated with
production and are not, therefore, a component of the direct cost of production. Therefore, as
subsidies are direct manufacturing inputs, they are counted as part of the factor cost. The
wealth produced by all private and governmental agents in a nation over a certain period is
measured by the Gross Domestic Product at Market Prices (GDP-MP). The largest
component of the national account reflects the most productive activity of the resident-
producing units.
Content and Application
Importance of GDP at fc
 GDP at factor cost is a measure of what a producer makes from commercial activity.
 This can be divided into several parts, including the capital, salaries, profits, rents, and
other well-known production factors.
 In addition to these costs, producers can also be responsible for registration fees, stamp
taxes, and property taxes.
 GDP at factor cost will now be replaced by gross value added (GVA) at basic prices.
 To calculate the current gross value added (GVA) at basic prices, production taxes, such
as property taxes, are added to GDP at factor cost, and subsidies are subtracted from
GDP.
Importance of GDP at mp
 The factor cost technique, which took into consideration the prices of items received by
producers, was previously used to calculate domestic GDP. In the revised approach,
consumer market price is taken into account.
 The revised GDP now includes more factories and includes more detailed information on
business activities. Costs associated with selling and marketing are now taken into
account in addition to production costs.
 The drawback of this approach is that the GDP number can be changed by altering how
subsidies are distributed or by raising taxes.

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Calculation of GDP at mp and fc
GDPmp= C+ I + G + X- M
GDPmp= 350 + 90 + 100 + 10
= 550
GDPfc = GDPmp+ Net indirect taxes
GDPfc = 550 – 5 = 545
Conclusion
Product taxes and production subsidies are included in market price, but not the other way
around. By deducting the number of intermediate goods from the total output generated by all
producers inside a nation's domestic territory, the GDP at Market Prices is computed. In other
terms, it is computed by multiplying the total gross value contributed by the current price.
Ans3(B)
Introduction

Due to considerable changes in an industry, a job title or professional area becomes obsolete,
leading to structural unemployment, a long-lasting type of unemployment. This happens to
employees who may not apply to other jobs or industries because of their skill sets.
Additionally, some professionals could live too far from positions that meet their qualifications
and be unable to move to regions where their qualifications are in demand. Jobs are still
available in the local labor market, but they need skills that the professionals presently do not
possess.

The ability to understand the current market and make informed decisions in light of that
analysis is improved for professionals and firms who track unemployment rates, particularly
structural unemployment rates.When experts quit one job in search of another, it is referred to
as frictional unemployment. This incidence occurs in all kinds of economies, including those
that are strong, because it's common for workers to look for a job that pays more or better meets
their interests. Employees who leave their existing positions voluntarily and professionals
looking for their first job are both categorized as having frictionless unemployment. Natural
unemployment, the lowest rate currently being experienced by an economy as a result of the
labor movement and economic dynamics, includes frictional unemployment.
Content and Application
Causes of structural unemployment
The causes of structural unemployment are numerous. Here are five possible reasons:

 Technological advancements
Businesses may automate processes, boost productivity, and phase out outdated
operational procedures thanks to new technologies. Many jobs are rendered obsolete as
a result, particularly in the manufacturing, agricultural, and trading sectors.
 Economic shifts
Economic developments can cause substantial changes for workers in popular areas
like the foodservice, hospitality, and retail. For instance, workers who make specialized

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 clothing items that suddenly become outmoded may lose their jobs making these items,
leading to structural unemployment.
 Governmental changes
Governmental regulations can occasionally have a negative impact on employees'
capacity to execute their jobs or even force businesses to relocate. Professionals who
are unable to adapt to rapidly changing settings as a result of these developments risk
losing their jobs before they have acquired alternative abilities.
Causes of frictional unemployment
The most common causes of frictional unemployment include:
 An employee quits their existing position without seeking a new one to take their place.
 A full-time employee has the money necessary to take time off.
 A person quits their employment to seek higher education.
 An employee wishes for improved pay or working circumstances.
 A worker is required to change jobs.
Conclusion

 Frictional unemployment
Includes persons who are waiting to start a job or are looking for one ( not bad, there is
mobility as people change or seek jobs)

 Structural unemployment

Due to modifications in the way the labor market is structured (skills become obsolete- a
new trade to be learned)