Cover Sheet

Please use the table below as your cover sheet for the 1st page of the submission. The sheet
shouldbe before the cover/title page of your submission.
BSAF
Program

MACROECONOMICS
Subject name

Final Term
Schedule Term

ACFI221106054
Student Registration Number (SRN)

Understanding Marketing Concepts

Report/Assignment Title

Date of Submission 25-11-2023

(Please attach the confirmation of any
extension received)

Declaration of Original Work:

I hereby declare that I have read and understood KFUEIT’s regulations on plagiarism and that this is
my original work, researched, undertaken, completed and submitted in accordance with the
requirements of KFUEIT.

The word count, excluding contents table, bibliography and appendices, is 1200 words.

Student Registration Number: ACFI221106054 Date:25-11-2023

By submitting this coursework, you agree to all rules and regulations of KFUEIT regarding
assessments and awards for programs. Please note, submission is your declaration you are fitto
sit.

KFUEIT University reserves the right to use all submitted work for educational purposes and
may request that work be published for a wider audience.
QUESTION NO: 1

Define GDP and explain its significance in measuring a country

economic performance?
Ans. The total market value goods and service produced with in a country in a
specific period of time is called GDP. For Example: Cotton, Rice, Textile,
Clothes, and Cement etc.

Formula: consumption+ Investment Government spending +Net Export

Component of GDP
1. The total amount of money households spend on goods and services is referred
to as consumption.

2. Investments include money spent on inventories, building homes, and capital

goods for businesses.

3. Government spending comprises the money the government spends on

products and services.

4. Net exports, which indicate the difference between what a nation sells to
foreign countries, are computed by deducting imports from exports.

One of the most important metrics for assessing the size and condition of a
nation's economy is its GDP. It shows the entire monetary worth of all
commodities and services produced inside the boundaries of a nation in a given
time frame, usually on an annual or quarterly basis.

GDP is important for measuring a nation's economy for the following

reasons:

1. OverallEconomic Health: GDP provide us total picture of economic

health. A rising GDP indicates the country’s growth rate and decreasing
GDP indicates low growth rate of economy
2. Standard of Living: GDP per capita, or GDP divided by population,
is a measure of a nation's average income and level of living. Access to
goods and services and improved living conditions are frequently
correlated with higher GDP per capita.

3. Standardized Measurement: GDP allows us to measure

standardized for comparison between different countries to know the
economic performance of country as compare to others and also
helps to policymaker that how their country’s rank globally.

4. Policy Decisions:
Policymakers use GDP data to make decisions and policies about fiscal and monetary policies,
such as budgeting, formulating economic strategies, and evaluating how policies affect the
state of the economy.

5. Investment and Business Decision-making:

Companies assess market potential, decide where to invest, and project
future demand for their goods and services using GDP data.

6 Employment Indication: changes in GDP correlate the changes in

employment. If the economy growing, businesses expanding they hire
more workers if the economy is not growing or in case of contraction
the production cut off and it leads unemployment.
 QUESTION .2

Compare the nominal and real GDP .why is real GDP consider accurate
measure of an economy output????
Nominal GDP measures current market prices, while real GDP adjusts for price changes using
base year prices, indicating true economic growth or contraction.

Reason why real GDP is ACCURATE

Real GDP, adjusted for changes in price levels, indicates an economy's

actual expansion or contraction, while nominal GDP represents the
total value of goods and services at current market prices.

Unemployment

A. Describe the different type of unemployment

1. Frictional Unemployment:
Unemployment occurs when individuals transition between jobs, often
voluntary and short-term, involving recent graduates, relocation, or
those seeking better opportunities.

2. Structural Unemployment:
Structural unemployment occurs when there is a skill gap between employers and
the workforce, often due to technological advancements or geographical
disparities.

3. Cyclical Unemployment:
Unemployment is linked to business cycles, particularly economic downturns or recessions,
where decreased demand for goods and services leads to job losses and layoffs in various
industries.

b. How does the unemployment rate impact an economy? Discuss its effects on
individuals and society
Economy:
1. Lower Consumer Expenditures:
Unemployment can lead to decreased disposable income, resulting in reduced
consumer spending, which can negatively impact industries and businesses reliant
on consumer demand.

2. Decreased Production and Output:

Reduced employment could lead to a drop in output and production across a
number of industries, which would hinder overall economic growth.

3. Government Expenditure:
Unemployment strains government resources, increasing spending on
unemployment benefits and social welfare programs. Higher unemployment rates
generally lead to a decrease in GDP due to reduced economic activity.

Financial Difficulties:
Unemployment can lead to financial instability, making it challenging for
individuals to pay bills, meet basic needs, and maintain a certain standard of
living.

Psychological effects:
Work-related stress, anxiety, and depression can arise from the loss of income, identity, and
social connections linked to the job.

Future Employability and Skill Erosion:

Extended periods of unemployment may result in a loss of expertise and experience, which can
complicate re-entering the workforce and affect an individual's long-term employability.
Increased Social Issues:
Increased unemployment rates can increases a number of social issues, including
rising crime, overburdened social services, and rising rates of poverty.

Health Care and Welfare:

Unemployment can impact access to healthcare, as individuals may lose health insurance tied
to their jobs, affecting their overall well-being.

Inflation
Question. A

Define inflation and discuss its causes. How is inflation measured?

A measure of an economy's level of goods and services over time. It a consistent
rise in general prices that reduces the purchasing power of money is referred to
as inflation. This means that as inflation increases, a unit of currency can purchase
fewer goods and services.

Causes of inflation
1. Demand-Pull Inflation:
This happens when an economy's total demand exceeds its total supply, creating an imbalance
that drives up prices.

2. Cost-Push Inflation:
This happens when businesses have to raise prices to keep their profit margins
due to rising production costs, such as rising wages or higher raw material prices.

3. Built-In Inflation:
Expected price increases give rise to demands for higher wages and prices, which
in turn feed the inflationary cycle.
4. Monetary Factors:
Inflation can also result from central banks expanding the money supply, which
chases too few goods with too much money.

QUESTION B.

Explain the difference between demand-pull and cost-push inflation.

Provide examples of each.
Demand-pull inflation occurs when the demand for goods and services exceeds
supply, leading to higher prices. This can be caused by factors like increased
consumer spending, fiscal policies, or growing exports. Cost-push inflation occurs
when production costs increase, forcing producers to raise prices to maintain
profit margins. Factors like rising wages, raw material prices, taxation, or supply
chain disruptions can cause both types of inflation.

FISCAL POLICY
QUESTION
Define fiscal policy and explain how it can be used to stabilize the
economy during periods of recession or inflation?
Fiscal policy is the government's use of taxes and spending to influence the
economy. It involves modifying these policies to improve the economy's state.
Expansionary fiscal policies, which increase public spending on social programs
and infrastructure during recessions, stimulate consumer business spending, job
growth, and increased demand for goods and services. Conversely, contractionary
fiscal policies are used during inflationary periods, where prices rise too quickly,
by cutting government spending and raising taxes to decrease the money in
circulation and slow down overall demand. Both policies aim to stimulate
economic growth and maintain a stable economy.
QUESTION

Compare and contrast expansionary and contractionary fiscal policies.

When might each be appropriate?
Expansionary fiscal policy is a strategy that increases government spending or
reduces taxes to stimulate economic growth during economic downturns or
recessions. It boosts aggregate demand, increases employment, and encourages
consumer spending. Conversely, contractionary fiscal policy decreases
government spending or increases taxes to slow down economic growth and curb
inflation. Expansionary policy is suitable for high unemployment, low consumer
spending, and a sluggish economy, stimulating demand, investment, and job
creation. Conversely, contractionary fiscal policy is suitable for rapid inflation,
rapid economic growth, and potential overheating, preventing inflationary
pressures.

MONETARY POLICY
Describe the role of a central bank in implementing monetary policy.
What tools does a central bank use to control the money supply?
In order to accomplish economic objectives like price stability, low inflation, and
maximum employment, monetary policy which involves controlling the money
supply and interest rates is primarily carried out by the central bank.

Central banks use various tools to control the money supply:

1. Open Market Operations

The central bank purchases or sells government securities in the open market,
injecting money into the economy and increasing the money supply, while selling
securities reduces it.
2. Reserve Requirements:
Banks can vary the amount of money they can lend out by adjusting the reserves
that commercial banks are required to hold, which is regulated by central banks
requirements increases the money supply as banks can lend more, while raising
requirements reduces the money available for lending.

3. Forward Guidance
Central banks provide forward guidance to the public and financial markets,
influencing decisions about spending and investing based on future interest rate
expectations, which are also influenced by this communication.

QUESTION.B
Discuss the potential impacts of expansionary and contractionary
monetary policies on interest rates, investment, and economic growth
Central banks use expansionary monetary policy to stimulate the economy by
increasing the money supply or decreasing interest rates, while contractionary
policy aims to slow economic growth.

Impact on Interest Rates:

Expansionary Monetary Policy:

This policy typically lowers interest rates, boosting the economy and making
borrowing cheaper, thereby encouraging businesses and individuals to take loans
for investment and spending.

Contractionary Monetary Policy:

This policy increases interest rates, making borrowing more expensive,
discouraging spending and investment, and potentially curbing inflation or
slowing down an overheating economy.

Impact on Investment:
Lower interest rates, which are a hallmark of an expansionary monetary policy,
encourage companies to borrow money for investments, which boosts capital
spending, company expansions, and employment growth.

Contractionary Monetary Policy:

Increased borrowing costs for investments result in lower capital expenditure and
business expansions, which may also have the unintended effect of decreasing
consumer spending.

Impact on Economic Growth:

Expansionary Monetary Policy: Expansionary Monetary Policy is a policy that
encourages economic growth by reducing interest rates and expanding the
money supply to stimulate spending and borrowing.

The Monetary Policy of Contraction:

This policy often leads to slower economic growth by limiting borrowing,
investment, and spending by increasing borrowing costs and lowering the money
supply to prevent excessive inflation.

Conclusion:
Expansionary monetary policy stimulates economic activity by
lowering interest rates and increasing the money supply, while
contractionary policy combats inflation by raising rates and
reducing the money supply.