FINANCIAL ANALYSIS

Financial Analysis Assignment



Financial Analysis Assignment

Question 1

1) In a closed economy the primary factors involved in decision making includes the firm and the household. The arrows marked by the red in the above diagram denote the secondary factors involved in the circular flow for a close economy.

Firms are responsible for providing consumers with products and services, while the households are liable for providing the factor of production in the form of labor and consumer expenditure. In a closed economy the Government and the international Economy is not involved.

National income in the economy is £10,000,000. The households are saving 10% of the national income which makes an amount of £100, 0000. This leaves an amount of £ 900, 0000, for the investments to be made by the firms. This is the amount that will be circulating in the economy and through which the creation of more money will be possible (Walsh 1998, pp.14-50).

2.1) According to Say's law, a fall in consumption won't have an effect on the level of firm's investment. As per Says law the production of goods is in itself the main source of demand generation. Thus a fall in consumption by 10% would not have much of an effect on the economy, because Says law states that production itself generates demand for itself.



2.2) The market adjustment that will initiate this change in investment is basically attributable to the notion that production would be liable for automatically bringing an adjustment in the economy. It would be an automatic process as the supply would itself generate demand in the economy foe goods and services. Firms will be very much inclined to increase their productivity and to reap better rewards from higher production.

3.1) The fall in consumption means that firms would stop producing goods due to low demand existing in the economy. When fewer products would be produced, then less income would be generated for the firm, which means the multiplier effect would be minimized for creating more money. Less money would then go to the factor labour which will further minimize the expenditure in the economy. Lack of demand prevalent in the economy may lead an economy into a recession. This would mean rising unemployment, low GDP growth rate, falling investments etc (Blanchard & Kahn 1980, 1305-1312).

3.2) Fiscal policy measures adopted by the government to stimulate the economy would be to reduce the taxes in the economy and to increase the level of government expenditure in the economy. Lower government taxes means that people will have more disposable income to spend; this would lead to an increase in aggregate demand in the economy. Increase in government expenditure would mean more money would be pumped in the economy. With a rise in the government expenditure, through the multiplier effect more income would be generated in the economy.

3.3) Deficit financing suggests that the government expenditure in the economy is more than the amount that the government has generated through ...