MACRO ECONOMICS

Macro Economics



Macro Economics

Answer No. 1

This part of study is related to Okun's Law, the Phillips Curve and the simple aggregate demand and supply. In this context, Okun's Law indicates the relation of the unemployment rate of an economy with the gross national product of economy. In the view of Arthur Okun, the unemployment rate decreases as the gross national product of economy increases which means there is inverse relationship between gross national product and unemployment of economy. Conversely, the law is particularly based on the U.S. economy, and it only applies when the rate of unemployment decreases between 3% to 7.5%. Besides it, the law also highlights the association of unemployment rate with the gross domestic product, which presents that when the unemployment rate is increased by 1% then GDP will fall by 2%.

In addition to this, Okun's law presents the relationship of aggregate output with the unemployment rate. The law is aims to focus on a concern that to what extent, a gross domestic product of country can be lost when the rate of unemployment is higher than natural rate. Moreover, in relation to aggregate demand and supply, the Okun's Law presents that the proportion by which gross national product changes when the change takes place in unemployment rate by 1 percent is known as Okun coefficient (Hubbard, 2009). The country whose major focus is on industrial sector with labor markets which are the developed countries hat is not very much flexible as compared to the economies like Germany and France, are inclined to have higher Okun coefficients. In these developed countries, the similar change in GNP percentage has a less significant effect on the rate of unemployment as compared to developing countries. Furthermore, aggregate demand and supply is a model for the reason that it is simple, though, the assumptions behind aggregate demand and supply are entirely dissimilar from those behind demand and supply that is aggregate demand and supply curves are not obtained from the inclusion of all the demand and supply curves in an economy (Leung, 2000).

Besides it, the Phillips Curve shows the inverse and stable relationship of unemployment and inflation. It presents that the lower unemployment rate of economy will more quickly increase the salaries paid to workers in that economy. It also states that due to the economic growth, inflation in an economy takes place which increases more jobs opportunities that is less unemployment in economy. However, this unemployment rate is also influenced by aggregate demand and aggregate supply which have its effect on the rate of inflation in the economy (McNown & Lee, 2006).

Answer No. 2

Tobin's Q Ratio calculated by dividing the company's market value by the cost of its assets. Though, in the case of this index in the denominator instead of the book value of the replacement cost of assets bearing material, and counter gross market value. Tobin's Q ratio is designed such to assist in the evaluation of whether to buy shares, but it can also be used ...