This subject is about International Economics course /// MBA Essay Example

International Economics

  1. On the graft below, draw the consumption function C=$150+0.8YD.

The consumption function when plotted, results into a positively slopped straight line. The slope is the Marginal Propensity to Consume (MPC) which is equivalent to 0.8 in our case. This shows that the consumers change their consumption by 80% when their income increases by one dollar. The $150 stands for the autonomous consumption which is the Y axis intercept of the Consumption function and it marks the lowest point of the consumers level of consumption and more so those that consume independent of income, they depend on Windfalls(Husted and Melvin,2003). The people who depend on the Autonomous Consumption are the “Consumers” which means that they do not have a source of income, may be because they are below the required age bracket to be in the labor force or are students. Therefore they depend on the “Producers” who are may be parents, guardians or financial institutions that offer financial support to the students.

The Disposable income is the Net income after tax deduction from the gross income of the consumer and the MPC is its coefficient.

The points for the plotting of the consumption function C= $150+0.8YD, are gotten mathematically by considering Y Intercept = $150 and The Slope of the function = 0.8

The MPC is given by the change in the consumption divided by the change in the income.

$150 being the Y intercept, then there is a point (0,150), randomly picking $600 along the Y-axis helps to get another point of the function.

ΔY/ΔX = 600-150/X-0=0.8

=450/0.8

=$562.5and the second point is (562.5, 600)

To get the point at which households begin to save, the following steps will be followed. Point A is the intercept of long run consumption curve and the short run, hence;

Cs=$150+0.8Yd

At Point A, C=Yd=150+0.8Yd

Therefore Yd=150+0.8Yd

Collecting like terms together we get

Yd-0.8Yd=150

0.2Yd=150

The X coordinate is 750, Substituting x for Yd in the short run consumption function we have C=150+0.8(750)

C=750, hence the X coordinate is 750

Leading to the conclusion that point A is at (750,750). The graft below show that point.

This subject is about International Economics course /// MBA

Figure 1: Graph showing relationship between long run and short run consumption functions

By how muchdoes consumption increase when income rises $200 beyond point A? Indicate this new level of consumption with point B.

At point A, the disposable income is $750 billion, an increase by $200 will land the disposable income at $950. If the point is plotted on the graph it coincides with point $910 on the consumption axis (Y axis) meaning that an increase in income of $ 200 will lead to an increase in consumption by $910-$750=$160.

Point B can also be realized through calculation i.e.

At point A we have x coordinate as 750, we add 200 to it to become 950 the use the short run consumption function to get the corresponding consumption level i.e

C=150+0.8(950)

See point B in the figure 1

  1. Fiscal and monetary tools are used to fix the macro economy. Briefly explain how might a tax cut affect both AD and AS?

In general terms economic growth and stability is driven by level of consumption in an economy. A heavy tax imposed on luxurious commodities may be perceived to cushion the poor while in the long run the tax burden shifts to them. This scenario may happen because the rich can become reluctant in buying the luxurious commodities reducing the market size for the commodities hence the producing companies’ whose big chunk of employees are the poor become redundant increasing the unemployment rate in the economy, bearing the burden of the heavy tax imposed.

This subject is about International Economics course /// MBA 1

Figure 2: Graph showing changes in Aggregate supply due to tax cut

A tax cut increases the disposable income available for households,subsequently increasing demand for commodities shifting aggregate demand function from AD1 to AD2 in figure 3 below. As a result of theincreased demand, companies will be pushed increased production mooted by increasing demand in the market.To bridge the gap of production (Aggregate supply) they may be forced to pay workers overtime as a motivation to work extra hours or even hire additional workforce to supplement the existing as a multiplier effect. The aggregate supply function as a result shifts inwards from AS1 to AS2 (figure 2) to provide for the increasing demand. The increased consumption leads higher profits which can be ploughed back to meet expansion and growth targets for the companies (Husted and Melvin, 2003).

This subject is about International Economics course /// MBA 2

Figure 3: Graph showing the effects of tax cut on aggregated demand

The cut in on the tax affect the government spending and this leads to a shift in the AD curve outwards.

  1. One of the goals of a Federated Government is to stimulate the economy. This may be achieved in three distinct steps. You are required to use 3 different grafts to indicate these three steps.

The Federal government works hand in hand with the Central Government to ensure there is a stability and growth in the economy for the better of the citizens and the country. To stimulate the economy, the Federal Government takes the following three actions:

  1. Cutting Down on the Interest Rates

Cutting down interest rates makes borrowing affordable inthe economy hence enhancing enterprise development. As a result of more funds being borrowed from the financial institutions, money supply increases in the economy hence level of investment increases commensurately creating employment opportunities for the economy. Increased employment leads to increase in available disposable income in the economy creating a jump in consumption hence increase in aggregate supply of commodities resulting to more production hence the economy gets a boost. In the figure below, as Interest rate increases the level of investment decreases and vice versa.

This subject is about International Economics course /// MBA 3

This subject is about International Economics course /// MBA 4

  1. Re-investing in Proceeds.

The individuals that own the mortgages have to be instructed to refinance them. This together with the proceeds that are paid to the Federal government on maturity of the bond holdings help in preventing the markets from freaking out.

This subject is about International Economics course /// MBA 5

Figure 5: Graph showing the relationship between freak out and proceeds

The more reinvestments in the proceeds are made, the more stable the markets become.

  1. Resuming Purchase Program

This is a way of cutting the interest rates for a longer term by the Federal government buying the Mortgage backed-bonds and T-bills from the public.This government action increases the amount of money in supply hence boosting investment initiatives, creating employment opportunities resulting increased consumption as well as aggregate supply.

This subject is about International Economics course /// MBA 6

Figure 6: Graph showing the relationship between interest rates and T-bills

The presence of the T-bills in the public is directly proportional to the interest rates. Lower interest rates are healthy for the stimulation of the economy(Husted and Melvin,2003).

Work Sourced

Husted, Steven L and Michael Melvin.International Economics. Boston, Mass.: Pearson/Addison-Wesley, 2004. Print.