Macroeconomics Assignment

NAME Tanya
ROLL NO. 231406
SECTION B
SEMESTER 2nd
SUBJECT Principles of Macroeconomics -1
COURSE B.com(hons)
QUESTION 1 :-
Discuss the scope of Macroeconomics?
ANSWER 1 :-
Macroeconomics is the study of aggregates or averages covering the

entire economy, such as total employment, national income, national
output, total investment, total consumption, total savings, aggregate
supply, aggregate demand, and general price level, wage level, and cost
structure.
Macroeconomics is also known as the theory of income and employment,
or simply income analysis. It is concerned with the problems of
unemployment, economic fluctuations, inflation or deflation, international
trade and economic growth. It is the study of the causes of
unemployment, and the various determinants of employment.
Scope of Macro Economics

Macro Economics is of much theoretical and practical importance. Let us see
what are the importance and the scope where macro economics are being used.
1. To Understand the working of the Economy
The study of macro economics variables is requisite for considerate the

operation of the financial system. Our main economic complexities are
associated with the performance of total income, irredundant and the normal
price scale in the fiscal. These variables are geometrically measurable in this
manner facilitating the probabilities of analysing the effects on the functioning
of the economy.
2. In Economic Policies
Macro Economics is extremely useful from the view point of the fiscal policy.
Modern Governments, particularly, the underdeveloped economies are
confronted with innumerable national problems. They are the problems of over
population, inflation, balance of payments, general under production etc. The
main conscientiousness of these governments rests in the regulation and
control of over population, general prices, general volume of commerce,
general productivity etc.
I. In General Unemployment
Redundancy is caused by deficiency of effectual demand. In order eradicate it,

effective demand should be raised by increasing total investment, total
productivity, total income and consumption. Thus, macro economics has special
significance in studying the causes, effects and antidotes of general redundancy.
II. In National Income
The study of macro economics is very significant for evaluating the overall
performance of the economy in terms of national income. This led to the
construction of the data on national income. National income data help in
anticipating the level of fiscal activity and to comprehend the distribution of
income among different groups of people in the economy.
III. In Economic Growth
The economics of growth is also a study in macro economics. It is on the basis of

macro economics that the resources and capabilities of an economy are
evaluated. Plans for the overall increase in national income, productivity,
employment are framed and executed so as to raise the level of fiscal
development of the economy as a whole.
IV. In Monetary Problems
It is in terms of macro economics that monetary problems can be analysed and

understood properly. Frequent changes in the value of money, inflation or
deflation, affect the economy adversely. They can be counteracted by adopting
monetary, fiscal and direct control measures for the economy as a whole.
V. In Business Cycle
Moreover, macro economics as an approach to fiscal problems started after the

great Depression, thus its significance falls in analysing the grounds of fiscal
variations and in providing remedies.
Question 2 :-
What is meant by Circular Flow of Income? State its
significance in an economy.
Answer 2 :-
The Circular Flow of Income is a simple model of economy showing flows of

goods & services and factors of production between firms and households. In
the absence of government and international trade, this simple model shows
that households provide the factors of production for firms who produce grads
and services, in return the factors of production receive factor payments i.e.
Land receives rent, Labour receives wages, Capital receives interest,
Organization earns profits (losses). These factor incomes - wages, rent, interest
and profits are spent on the output of firms.
In reality the households do not spend all their current income. The 'savings' by
them represents a leakage from the circular flow. Firms also have, besides,
consumer spending, investment spending. This is injected to the circular flow of
income, as it does not originate from consumer's current income.
Additional leakage and injections are also thee in the circular flow in real world.
i.e. Government's spending are injected and taxation will leak from it. Similarly
Export flows will be injected and import flows leaked.
Flow can be of two types:
(i) Flow of goods & Services.
(ii) Flow of money.
Importance of the Circular Flow

The concept of circular flow gives a clear cut picture of the economy. We know
whether the economy is working efficiently or whether there is any disturbance
in its smooth functioning.
1. Study of Problems
It is with the help of circular flow that the problems of disequilibrium and
the restoration of equilibrium can be studied.
2. Effects of Leakages and Inflows
The role of leakages enables us to study their effects on the national

economy. For instance, imports are a leakage out of the circular flow of
income for the reason that they are payments made to a foreign country.
3. Link between Producers and Consumers
The circular flow establishes a link between producers and consumers. It is

through income that producers buy the services of the factors of
production with which the latter, in turn, purchase goods from the
producers.
4. Creates a Network of Markets
As a corollary to the above point, the linking of producers and consumer

through the circular flow of income and expenditure has created a
network of markets for different goods and services where problems
relating to their sale and purchase are automatically solved.
5. Basis of the Multiplier
Again, if leakages exceed injections in the circular flow, the total income
becomes less than the total output. This leads to a cumulative decline in
employment, income, productivity and prices over time. Conversely, if
injections into the circular flow exceed leakages the income is increased in
the economy. This leads to a cumulative rise in employment, income,
output and prices over a period of time. In fact, the basis of the Keynesian
multiplier is the cumulative movements in the circular flow of income.
6. Importance of Monetary Policy
The study of circular flow also highlights the importance of monetary

policy to bring about the equality of saving and investment in the
economy. The credit market itself is controlled by the government through
monetary policy. When saving exceeds investment or investment exceeds
savings, money and credit policies help in stimulate or retard investment
spending. This is how a fall or rise in prices is also controlled.
7. Importance of Fiscal Policy
The circular flow of income and expenditure points toward the importance
of fiscal policy. Thus the circular flow of income and expenditure tells us
about the importance of compensatory fiscal policy.

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NAME Tanya

ROLL NO. 231406

SUBJECT Principles of Macroeconomics -1

Macroeconomics is the study of aggregates or averages covering the

Scope of Macro Economics

The study of macro economics variables is requisite for considerate the

Redundancy is caused by deficiency of effectual demand. In order eradicate it,

II. In National Income

III. In Economic Growth

The economics of growth is also a study in macro economics. It is on the basis of

IV. In Monetary Problems

It is in terms of macro economics that monetary problems can be analysed and

Moreover, macro economics as an approach to fiscal problems started after the

The Circular Flow of Income is a simple model of economy showing flows of

Importance of the Circular Flow

2. Effects of Leakages and Inflows

The role of leakages enables us to study their effects on the national

3. Link between Producers and Consumers

The circular flow establishes a link between producers and consumers. It is

4. Creates a Network of Markets

As a corollary to the above point, the linking of producers and consumer

5. Basis of the Multiplier

6. Importance of Monetary Policy

The study of circular flow also highlights the importance of monetary

7. Importance of Fiscal Policy

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