Fundamentals of Macroeconomics Paper

Kisha Smith

ECO/372

12/15/2012
Kathleen Byrne

Fundamentals of Macroeconomics Paper

Colander (2010) stated,” economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social; customs, and political realities of the society” (p.4).
Part I In order to understand certain aspects of economics one must be able to recognize and comprehend terms that may not be used in our daily lives but have tremendous affects on our households. Gross domestic product it’s the dollar value of all goods and services us or any other country produces in a year. Nominal GDP is the amount of the GDP in total with no inflation taken into account. Real GDP is the amount of GDP in total with inflation taken into account. The unemployment rate is the number of unemployed divided by the number of people in the labor force and multiplies that figure by one hundred percent to get the unemployment rate in figures. The inflation rate is the annual percentage rate of increase in the average price level this is acquired by observing price increases and this rate can induce or reduce purchasing power. Finally interest rate is the price of the money being borrowed from a lender.
Part II There are several activities that affect the government, households as well as businesses. Purchasing groceries is a form of consumption which adds to GDP and keeps the flow of income moving. The revenue earned from the purchased groceries can potentially be retained earnings that are invested in the company through new machinery and returned to the flow of income. This same revenue can bring new customer relationships because the product or service can be produced or bought quicker due to the investment in new equipment. When a business or households taxes due or owed is reduced the desire to spend money and stimulate the economy arises and vise-versa paying more taxes decreases spending power. A massive layoff of employees would slow down production and most likely the performance and moral of remaining employees would be in jeopardy. The economy will suffer because the unemployment rate will rise and the amount of free cash in each one of these households will be reduced. The purchase of groceries may be affected but never depleted the food budget may shrink but food consumption is essential for every individuals survival. Government would pay these employees unemployment benefits according to the laws of their state for a period of time. Any reduction in investment spending implies a reduction in household incomes. A decrease in taxes to a particular household would mean consumption will increase because of more disposable income. This spending will result in higher sales and this will reflect upon the GDP because new spending causes aggregate demand shifts. Property taxes are a fixed cost for a firm and if reduced disposable income becomes obtainable. Payroll taxes add directly to marginal