Question 1

Economists refer to the term “macroeconomics” meaning the study of how the broad
behaviour of the economy as a whole not individual markets for goods and services.
Macroeconomics is concerned with the behaviour of economic aggregates, such as
total output, total investment, total exports, and the price level, and with how
government policy may influence these aggregates. These aggregates result from
activities in many different markets and from the combined behaviour of a large
number of different decision makers.

Question 2

a)

C - Consumption means expenditure on all goods and services sold to their final
users during the year

I - Investment means expenditure on goods not for present consumption, including

inventories; capital goods, such as factories, machines, etc.

G - Government expenditure means governments provide goods and services that

households & Firms want, such as street-cleaning and firefighting, expenditure of
public health, education etc.

X – Exports means the value of all goods and services sold to firms, households,
and governments in other countries.

M – Imports means the value of all domestically produced goods and services
purchased from firms, households, or governments in other countries.

b)

Net Exports is the value of total exports minus the value of total imports. Net exports
are defined as total exports minus total imports (X-M) in the GDP equation. This
means it affects GDP in two ways. When net exports are more than imports, the
value of net exports is positive which increases GDP. On the flip side, when the
value of imports is higher that the value of exports, net exports is negative which
decreases GDP.

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Question 3

Expansionary Aggregate Demand – This factor causes expansionary phase of the

business cycle until it leads to the peak of the cycle. A positive AD shock first raises
prices and output along the AS curve. It then induces a shift of the AS curve that
further raises prices but lowers output.

Contractionary Aggregate Demand - This factor causes recessionary phase of the

business cycle until it leads to a trough of the cycle. As real GDP falls below
potential, a recessionary gap is created, and unemployment rises.

Negative aggregate supply – This factor takes the economy into a trough then into
recovery. A negative AS shock caused by an increase in input prices causes real
GDP to fall and the price level to rise. The economy’s adjustment process then
reverses the AS shift and returns the economy to its starting point.

Question 4

i) Real GDP

In a recession the level of output is low in relation to the economy’s capacity to

produce. There is thus a substantial amount of unused productive capacity.

In an expansion phases real GDP is high with relative ease merely by re-employing
the existing unused capacity and unemployed labour.

ii) Unemployment

In a recession unemployment is very high both unemployed resources and

unemployed people.

In an expansion run-down or obsolete equipment is replaced hence employment,

increases as more output is required.

iii) Inflation

In a recession inflation is very high due to low production relative to demand

In an expansion inflation is low as suppliers are producing meet demand

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Question 5

Graph B depicts Cost-Push inflation. Cost-push inflation occurs when we experience

rising prices due to higher costs of production and higher costs of raw materials.
These are called supply-side factors, such as higher wages and higher oil prices and
cause Short-run aggregate supply curve shifts to the left, causing a higher price level
and lower real GDP.

Graph A depicts Demand-pull inflation. Demand-pull inflation is a period of inflation

which arises from rapid growth in aggregate demand. It occurs when economic
growth is too fast. This depicted by a rightward shift in the aggregate demand curve.

Question 6

Price stability is a state of economy characterised by little to no changes in the

general price level either upwards or downwards. Price stability implies avoiding both
prolonged inflation and deflation.

Price stability is important for business because it makes it possible to achieve high
levels of economic activity and employment by improving the transparency of the
price mechanism. Hence business can be paid prices fairly determined by the maket.

Price stability reduces inflation risk premium in interest rates which is a

compensation for investing in an unstable economy thus reduces real interest rates
and increases incentives for businesses to invest

Price stability helps avoid unproductive activities to hedge against the business
against the negative impact of inflation or deflation

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Bibliography

Janse van Rensburg, J, McConnell, CR and Brue, SL. (2011). Economics: Southern
African Edition. McGraw-Hill.

Mohr, P. and Associates.(2015). Economics for South African students. Van Schaik
Publishers. 5th edition

Parkin, M (1996) Economics. 3rd edition. Addison-Wesley