Macroeconomic (Coursework Sample)

Macroeconomics
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1. Analyze how economic growth might improve the standard of living in a country.
Increased consumption: Consumers benefit from increasing their consumption of goods and services. Economic theory presupposes that expenditure is attributed to utility and thus that higher consumption patterns imply greater prosperity.
Enhancement of public services: Increased tax revenues enable the government to invest more in critical public services like health and education. Improved universal healthcare can enhance one's quality of life by curing diseases and extending one's life expectancy. Increased literacy levels can result in a more excellent range of skills and education among the population. It results in increased opportunity and liberty. Education is viewed as a critical factor in determining one's welfare and contentment.
Reduced poverty and unemployment: Economic growth contributes to unemployment reduction by generating jobs. It is substantial because low employment rates contribute significantly to social problems like crime and alienation. Strong economic growth since World War 2, the EU continues to have areas of high unemployment (Tsoukis, 2020). For example, structural unemployment is at an all-time high in France and Spain at the moment. This type of unemployment may be impossible to eradicate through economic growth.
Reduced poverty: Even over the last couple of decades, economic activity has declined 'absolute' poverty.
2. Explain why measuring the inflation rate using a consumer price index (CPI) may not be accurate.
CPI is an efficient way for calculating the cost of living and the relative price level over time; it does not provide an entirely accurate estimated cost of living because it is focused on a fixed basket of goods. Three issues with the CPI are worth mentioning: substitution bias, new item introductions, and quality changes.
Substitution Bias: The CPI's first flaw is its substitution bias. While the consumer prices fluctuate from year to year, they do not fluctuate uniformly. The quantity of specific items purchased by consumers varies according to the price changes of the consumables in the fixed basket (Tsoukis, 2020). However, because the basket is fixed, the Consumer price index does not represent consumer preferences for items whose prices fluctuate little from year to year.
New Items Are Introduced: The second issue with CPI is its inability to incorporate new items. With time, new items are added to the typical consumer's commodity.
Changes in Quality: The third issue with the CPI is that it does not adequately account for shifts in customer satisfaction. When the quality of an item in the resolved bundle of products used to calculate the CPI goes up or down, the item's value and desirability change.
3. Governments aim to keep inflation low at around 2%. Evaluate the reasons why governments might want to keep inflation at this rate.
There are numerous advantages to low inflation (2 %). Low and stable inflation encourages firms to invest, which results in increased production capacity and future higher fiscal growth rates. Johnson (2017) states that if inflation is allowed to rise due to lax monetary policy, an economic boom may occur; conversely, if this economic growth surpasses the long-run trend rate, it is likely to be untenable, and a recession will precede the growth. Frequently, policymakers correlate low inflation with annual increases in a broad index of customer spending between 1% and 2%, a rate dubbed as the "Ideal Long-Run Inflation Rate" (Tsoukis, 2020). This rate reflects, in part, minor measurement errors caused by imprecise adjustment for production parameters and the release of new goods. Additionally, the rate serves as a buffer against the possibility that a negative macroeconomic shock would force policymakers to confront the zero lower constraints on inflation expectations.
4. Applying the Monetary policy during periods of rising inflation can cool down the economy. Do you agree? YES
Monetary policy, also known as the consumer end of economic strategy, refers to the ability of a country's central bank to manage the money supply and focus on achieving macroeconomic objectives that promote sustained economic development. The government combats rising inflation by implementing a contractionary monetary policy. Increased money supply can result in increased inflation, thereby increasing the cost of living and doing business (Tsoukis, 2020). Contractionary monetary policy, which entails raising interest rates and containing the inflationary pressure, is intended to contain inflation. It may slow the economy and increase unemployment, but it is frequently necessary to bring the economy back under control.
5. Comment on the potential multiplie