Eco Assignment Hassan - Qs. Draw graphs including the...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Qs. Draw graphs including the shifts in any, and explain the reasoning of your work on the graphs, according to the several scenarios given? A) Government announces a large increase in spending on health and education. Inflation AS AD AD Real National Income Government spending is a major constitute of aggregate demand which can be seen from the following formula: Y= C+I+G+(X-M) If government announces a large increase in spending on health and education, aggregate demand will increase which can be seen from an outward shift of AD curve. The capacity of economy will fall which would lead to decrease in real national income. Thus economy would experience lower economic growth which in turn would lead to rise in unemployment. As the scenario is related to the significant increase in world oil prices, the increase in unemployment is hefty because most of the industries depend on oil for variety of uses. B) Chancellor announces tax exemption scheme on new investments for small to medium sized business. Inflation AS AD AD The exemption of taxes on new investments for small to medium sized businesses is likely to impact on aggregate demand. This is because the exemption of taxes on small to medium businesses encourages the investor to invest their money more in small businesses. Given the wide-ranging impact, it is likely to lead an increase in aggregate output. The AD curve will therefore shift towards right. This will lead to rise in inflation from 2.5% to 3.0%. This rise is relatively small and can be explained by the fact that the tax exemption is only on the small to medium size businesses not on the large scale businesses thats why the impact is small. As AD shifts to the right, the capacity of economy rises and we would expect real national income to rise to Y2 and the economy would experience greater economic growth. This, in turn, would suggest that unemployment is likely to fall. If more investors invest in the market due to this fact the unemployment will fall more. C) New regulations on national insurance and pension schemes will increase red tape surrounding employment claims the Confederation of British Industry (CBI). Inflation AD AD AS Real National Income Here, the spending from the government will increase which will lead to an increase in Output. Since the spending are increasing more and money will flow in the market that is the supply of money will increase which will in turn increase the inflation rates. Thus, this shows that there will be a rightward shift in the AD curve. In other words spending is investment which always causes the output to rise bringing a fall in the interest rates as well. Since, interest rates are inversely proportional to the inflation, inflation will rise. An increase in the inflation shows why there are inefficiencies in the economy surrounding the employment. The claims of CBI are thus right about the problems around employment. This is because regulations/spending are done in pensions and insurances....
View Full Document

Page1 / 11

Eco Assignment Hassan - Qs. Draw graphs including the...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online