GREAT ZIMBABWE UNIVERSITY

FACULTY OF COMMERCE

NAME: MUZIRINGA TANYARADZWA A

REG NO: M225756

CONTACT NUMBER: 0787 790 241

DEPARTMENT: ACCOUNTING & INFORMATION SYSTEMS

PROGRAMME: ACCOUNTING

COURSE NARRATION: MACRO ECONOMICS

COURSE CODE : HEC 127

LECTURER’s NAME: Ms BS Makamba

LECTURER’s COMMENT: ………………….....................................................

........................................................………………………………………………….

MARK

QUESTION 1
 a) Keysian theory of income determination can be explained by assuming two sectors in the
economy namely households and business firms. Equilibrium under the two sector
model, Aggregate demand is equal to the aggregate supply or the aggregate expenditure
equals aggregate income. In the two sector economy, the income function is Y = C + I.
Below is the diagram illustrating the equilibrium in the keysian two sector model.

However, Keynes held the view that that there is no reason to believe that: (i) consumers’
consumption plan always coincides with producers’ production plan, and (ii) that
producers’ plan to invest matches always with households plan to save putting it
differently, there is no reason for C + I and C + S to be always equal.

Depicting from the Diagram 1, consider a level of income below Y0, for example Y1,
generates consumption as shown along the consumption function. When this level of
consumption is added to the autonomous investment expenditure (I), the aggregate
demand exceeds income; i.e the (C +1) schedule is above the 45° line.. Excess demand
makes businesses to sell more than what they currently produce. The unexpected sales
would draw down inventories and result in less inventory investment than business firms
planned. They will react by hiring more workers and expanding production. This will
increase the nation’s aggregate income. It also follows that with demand outstripping
production, desired investment will exceed actual investment in order to restore the
equilibrium level of income.

Y = AE

C+I

EXPENDITURE

OUTPUT / INCOME
 b) Y = C + I

C = a + By

Where a = autonomous consumption

b = induced consumption

i) Autonomous spending = a + G + I

= 800 + 200 + 500

= 1500

ii) Multiplier is denoted by K

K= 1

1 - MPC

1/ 1-0.8

iii) Y= C+I+G

I = 500

G =200

Y = 800 + 0.8Y +I +G

Y – 0.8Y = 800 + 500 + 200

0.2Y = 1500

Y = 7500

Question 2

Free trade is international trade without restrictions. Free trade reduces barriers to imports and
exports of goods and services such as tariffs, quotas, subsidies, embargoes, and product standard
regulations between member countries. Below mentioned are a few examples of free trade
agreements between countries. EFTA (European Free Trade Association): a free trade agreement
between Norway, Iceland, Switzerland, and Liechtenstein.

Economists argue that free trade promotes economic growth and it is essential to customers.
Economic growth refers to an increase in the size of a country's economy over a period of time.
The size of an economy is typically measured by the total production of goods and services in
the economy, which is called gross domestic product (GDP).Economic growth can be measured
in ‘nominal’ or ‘real’ terms. Nominal economic growth refers to the increase in the dollar value
of production over time. This includes changes in both the volume of production and the prices
of goods and services produced. Economists normally talk about real economic growth – that is,
increases in the volume produced only, which takes away the effect of prices changing. This is
because it better reflects how much a country is producing at a given time, compared with other
points in time.

Free trade agreements contribute to greater economic activity and job creation in Zimbabwe ,
and deliver opportunities for big and small Zimbabwean businesses to benefit from greater trade
and investment. Free trade agreements don't just reduce and eliminate tariffs, they also help
address behind-the-border barriers that would otherwise impede the flow of goods and services;
encourage investment; and improve the rules affecting such issues as intellectual property, e-
commerce and government procurement. Free trade agreements give Zimbabwean businesses
and consumers improved access to a wider range of competitively priced goods and services,
new technologies, and innovative practices.

Foreign investment is likely to be obtained by the Zimbabwean business as a result of free trade
Free trade agreements promote regional economic integration and build shared approaches to
trade and investment between Zimbabwe and our trading partners. Trade agreements can deliver
enhanced trade and investment opportunities that contribute to the economic growth of less-
developed economies. Free trade agreements support stronger people-to-people and business-to-
business links. Trade agreements can continue to provide additional benefits to Zimbabwe and
trading partners over time, including via in-built agendas that encourage ongoing domestic
reform and trade liberalization.

Despite all the benefits brought about by a free trade area, there are also some corresponding
disadvantages, including:

Threat to intellectual property

When imports are freely traded, domestic producers are often able to copy the products and sell
them as knock-offs without fear of any legal repercussions. Therefore, unless the authorities
include provisions for intellectual property laws and enforcement there are no protections for
exporting companies.

Unhealthy working conditions

Outsourcing jobs in developing countries can become a trend with a free trade area. Because
many countries lack labor protection laws, workers may be forced to work in unhealthy and
substandard work environments.

Less tax revenue

Since member countries are no longer subject to import taxes, they need to think of ways to
compensate for the reduced tax revenue.

QUESTION 3

a) i) Labor force = Number of employed + Number of unemployed

138 547 +6 21 000 = 759 547

ii) labor force participation rate = ( labor force ÷ civilian non institute population ) x 100

= ( 759 547 ÷ 6 772 300) x 100

= 11.22%

iii) Unemployment rate = (unemployed ÷ labor force ) x 100

= ( 621000 ÷759 547) x 100

= 81.86%

iv) Employment rate = ( Total of employed ÷ labor force ) x 100

= ( 138 547 ÷ 759547) x 100

= 18.24%
b)

The term unemployment refers to a situation where a person actively searches for employment
but is unable to find work. Unemployment is considered to be a key measure of the health of the
economy. The most frequently used measure of unemployment is the unemployment rate. It's
calculated by dividing the number of unemployed people by the number of people in the labor
force. The most frequently used measure of unemployment is the unemployment rate. It's
calculated by dividing the number of unemployed people by the number of people in the labor
force.

Structural unemployment is the idea that unemployment is caused by a mismatch between the
jobs there are in the economy and the skills that workers have.³ This might be because of new
technologies which change the need for certain skills in the population, policy changes like
minimum wages changing how many workers businesses can afford, changes in social attitudes
towards certain types of jobs. For example, fishing jobs have rapidly declined due to a mixture of
depleting fish stocks, policies trying to limit fishing, and the introduction of machines that
requires less labor. This has caused unemployment in many fishing villages across many
developed countries. However this type of unemployment can be adjusted by doing refresher
courses to the workers so as to suit the job type.

Systemic unemployment looks at the whole economic system, and asks the question - who
actually benefits from unemployment? The systemic unemployment theory argues that
capitalists, or the people that own all the businesses in the economy, actually benefit from
unemployment. Why? Well, it’s much easier to keep people working hard for a lower wage, if
there are a lot more people looking for work who can replace them. So it is in the interests of the
people who hire and fire (ie the business owners), to make sure that unemployment stays above a
low level. This type of unemployment can be reduced only by government or workers union by
imposing statutes that protect human labor so as prevent business owners from manipulating
workers.

Political unemployment argues that unemployment is caused by artificially keeping wages too
high. Through things like trade unions, minimum wages and labor regulations, wages are pushed
up so that workers become too expensive for businesses and so there are more people looking for
jobs than actual jobs available.
However there are strategic ways to tackle unemployment in an Economy. Strategy 1 Use of
Labor-intensive Technology: Both the organized and un-organized sectors must adopt labor-
intensive technology if sufficient employment opportunities are to be generated in both the rural
and urban sectors of the economy. Increasing mechanization of agriculture in various states has
lowered the employment elasticity of growth of agricultural output. Therefore, for raising labor
intensity, suitable monetary and fiscal measures need to be adopted to discourage the use of
capital-intensive techniques.

For solving unemployment problem in the urban areas, the organized industrial sector must also
absorb a sufficient number of workers. The failure of the organized industrial sector to generate
enough employment opportunities is due to the use of capital-intensive technologies imported
from abroad. The other factor responsible for the use of higher capital intensive technologies is
the factor-price distortions such as cheap capital and relatively higher wages of workers who
have strong labor unions. Capital has become relatively cheap due to various fiscal concessions
such as liberal depreciation and investment allowance and low interest rates on borrowed funds
for investment. Consequent to the use of high capital-intensive technologies in our industries the
labor productivity has been increasing while employment has been growing at a snail pace.

Lastly, the expansion of education and health care not only promotes accumulation of human
capital and thereby contributes to growth of output, it will also generate a good deal of
employment opportunities. More schools, hospitals, health care clinics in the rural and urban
areas will not only create employment during their construction but also, and more important,
when they start working to provide education and health services. Their working provides
employment to both the educated and unskilled persons. Therefore, a higher allocation of
resources is required to be made for them in government budgets and in our future plans.

Question 4

A negative supply shock is an event that suddenly increases or decreases the supply of a
commodity or service, or of commodities and services in general. This sudden change affects the
equilibrium price of the good or service or the economy's general price level.
In this case, there is a sudden decrease in supply of sugar cane in an economy. In the short run,
an negative supply shock in sugar cane will shift the aggregate supply curve for sugar leftward,
decreasing the output and increasing the price level. The cost of production increases pushing the
prices to go up. Since Sugar cane is a factor of production for wide range of variety of goods.
This negative supply shock can cause stagflation due to a combination of rising prices and falling
output.
The effects of negative supply shock are shown on the diagram on the following page.The initial
position is at point A, producing output quantity Y1 at price level P1. When there is a supply
shock, this has an adverse effect on aggregate supply: the supply curve shifts left (from AS1 to
AS2), while the demand curve stays in the same position. The intersection of the supply and
demand curves has now moved and the equilibrium is now point B; quantity has been reduced to
Y2, while the price level has been increased to P2. The remain constant.
In long run recall that the LRAS is vertical at the full employment output. This is the amount of
output associated with any point on the PPC. We assume that tge economy is operating at a full
employment. The will be no expansion in out put.
Here is what will happen: As a result of the temporary negative supply shock, output goes down,
but inflation and unemployment go up. The increase in unemployment will theoretically lead to
lower wages (because their is less competition for labor, so firms do not have to compete for
workers with higher wages). SRAS increases once wages have adjusted, because a decrease in
the price of a input to production will lead to an increase in SRAS. Output returns to the full
employment output. The output remains constant in long run. This can be shown on the diagram
4(b) on the next page.
If the negative supply shock is permanent, that makes the entire economy less productive, such
as stricter regulations on production. Here is what will happen: The capacity of the economy has
decreased, so LRAS shifts to the left. Because such regulations make the cost of production
higher, SRAS will also decrease until output has returned to the full employment output. In this
case, output is permanently lower and the price level permanently higher.

(b) Which demand and supply side policy prescriptions would you recommend? [13 marks]
Demand-side policy is an economic policy focused on increasing or decreasing aggregate
demand to influence unemployment, real output, and the general price level in the economy, and
Supply-side policies aim to improve productivity and efficiency and thus boost long-run
aggregate supply. The demand side policies controls the short term aggregate supply.

Demand-side policy

To address the above problems caused by negative supply shock of sugar cane, the ministry of
finance must cut tax as any fiscal policy and this leaves businesses and consumers with extra
cash, which they are encouraged to spend to stimulate the economy. Consumers will remain with
an increased disposable income due to the cut of income tax and spend more on consumption and
once this happens it stimulate demand and leading to the Sugar cane responding in producing
more to meet equilibrium point.
The monetory policies are also the demand side policies used to address the above problems
caused by negative supply shock, The economy's central bank can vary the interest rates, money
supply and cash reserves in order. Expansioary monetary policies are used in this case. Lowering
cash reserve by other banks, decreasing the interest rate to make also stimulate demand.

Supply side policies.

By introducing the corporate tax as a fiscal policy means the cost of production for sugar cane
will be lowered due to decrease in corporation tax and produce more sugar cane resulting in an
increased output.

Also lowering the interest rate also have a supply-side effect as they make borrowing less costly.
This means the decreased cost of borrowing leads to decreased total average cost there by
leading to lower prices of Sugar cane products in an economy.

The nation must put maximum wages through labour relations negotiations as a supply side
police, This makes business environment more friendly for firms to operate. These encourage
firms to invest in their production capacity and ways to increase efficienc as the production costs
decreases due to the decreased labour costs.

The ministry of finance must also subsidise the sugar can industry. Paying part of the production
costs by the government to the Sugar cane suppliers. This will increase the production of Sugar
Cane in the economy.

To summarize and note well demand-side policies can increase output of sugar cane in the short
run. Eventually, aggregate supply will adjust to a higher price level, and the output will be back
to its long-run potential level. In the long run, attempts to increase output by demand-side
policies will only result in a higher price level and higher nominal wages while real output
remains at where it has started, the long-run potential output. In long run supply side polices are
the best players to increase output.
References

Fredriksson, D., 2021. Reducing unemployment? Examining the interplay between active labour market
policies. Social Policy & Administration, 55(1), pp.1-17.

Gabaldon, P., De Anca, C., Mateos de Cabo, R. and Gimeno, R., 2016. Searching for women on boards:
An analysis from the supply and demand perspective. Corporate Governance: An International Review,

Murakami, H. and Zimka, R., 2020. On dynamics in a two-sector Keynesian model of business cycles.
Chaos, Solitons & Fractals, 130, p.109419.

Elhorst, J.P., 2003. The mystery of regional unemployment differentials: Theoretical and empirical
explanations. Journal of economic surveys, 17(5), pp.709-748.

24(3), pp.371-385.

Krugman, P., 1994. Rethinking international trade. MIT press.