BUSINESS MACROECONOMICS

Business Macroeconomics

Business Macroeconomics

1. (a) The federal government increases pensions and welfare spending.

Ageing critically affects pension systems which in turn play a crucial role in the welfare of retired and elderly. In most European countries public pensions are a large part of the retirement income. In many cases, especially in Southern Europe, public pensions provide the main source of income to the retired.

The workhorse modelling framework of Blanchard (1985) with overlapping generations and finite horizons is employed. In order to capture life cycle behaviour and introduce public pension systems, we adopt a modified version of the framework in Nielsen (1994) and Bettendorf and Heijdra (2005).

1. (b) There is a marked drop in consumer and business confidence within the economy.

A positive outlook by consumers generally translates into healthy future spending. Since consumer spending accounts for the largest segment of the economy, strong numbers will be needed to prevent the economy from weakening any further and reduce excess inventories.

The confidence index is also closely watched by investors on Wall Street. They use it to predict future spending patterns which affect corporate profits down the line. An increase in the index means that consumers have a more positive outlook on the future and will be spending more. This will lead to an increase in revenue growth and corporate profits. The latest report sparked a surge on the DJIA and Nasdaq. Hopefully this positive trend will continue While the latest report is a sign that maybe the weakening trend is beginning to slow and the economy is bottoming out, more data is still needed. The manufacturing sector is still in a recession and durable goods orders declined. Information from April and May will paint a better picture of what these mixed economic signals actually mean.

(c) A mineral export boom.

The real appreciation is essential to affect the reallocation of factors of production out of the non-booming industries and the non-traded sectors and into the minerals sector, such that the economy can accommodate the mineral export boom and enjoy the fruits of the increased wealth in the economy (Findlay 1985, Neary and van Wijnbergen 1986). Therefore, a priori there is in nothing in mineral export booms and any resulting Dutch disease phenomena that impedes economic growth and development. Within the specific factors model a resource boom must increase national welfare (Corden and Neary 1982).

(d) An appreciation in the foreign exchange rate value of the economy's currency.

Exchange rates respond directly to all sorts of events, both tangible and psychological:

Business cycles;

Balance of payments;

Political developments;

New tax laws;

Stock market news;

Inflationary expectations;

Interest rate differentials;

International investment patterns;

And government and central bank monetary policies among others.

At the heart of this complex market are the same forces of demand and supply that determine the prices of goods and services in any free market. If at any given rate, the demand for a currency is greater than its supply, its price will rise. If supply exceeds demand, the price will ...