INTRODUCTION
Macroeconomics can be best understood in contrast to microeconomics which considers the decisions made at an individual or firm level. Macroeconomics considers the larger picture, or how all of these decisions sum together. An understanding of microeconomics is crucial to understand macroeconomics.
To understand why a change in interest rates leads to changes in real GDP, we need to understand how lower interest rates influence decisions, such as the decision of how much to save, at the firm or household level. Once we understand how an individual, on average, will change their behavior we will then understand the large scale relationships in an economy.
The Economist's Dictionary of Economics defines Macroeconomics as "The study of whole economic systems aggregating over the functioning of individual economic units. It is primarily concerned with variables which follow systematic and predictable paths of behavior and can be analyzed independently of the decisions of the many agents who determine their level. More specifically, it is a study of national economies and the determination of national income."
An additional throughout history it can be identified that countries do not always experience continues growth in national output but also experiences periods of contraction in the overall level of economy activities.
MAIN BODY
TASK 2
I am only having RM 500 in my wallet. I divide the amount that I have into the three motives for holding money. That is transaction motive, precautionary motive and speculative motive.
The most obvious answer is that we hold some money because it's convenient to buy stuff with. And we will call this first reason the transactions motive. Household need to hold money for this motive or purpose since it is common to receive money at intervals for example; salary at the end or beginning of the month, but money is used or spends every day during the whole month.
One of the most important functions of money is that it is the universally accepted medium of exchange this is the main reason you hold money. From in statement I only have RM 50 to my transaction motive. For my food expenses when I'm in college. And my day to day expenses include my travelling expenses.
Precautionary motive represents the amount of money that household put aside for uncertainties or unexpected expenses. We also hold money in case we need to spend it. Unexpected bills or contingencies may mean that we need to hold a little extra money in case. Like the money we hold in banking account. In this statement I always save RM 250 for my unexpected expenses. For example; to buy health products if it's suddenly finish. And I save it to use for any necessary things if happens. It's only around RM 100. But the balance RM150 I should to pay to my college fees for my studies.
An additionally speculative motive means the amount of money that household put aside while they wait for the right time to purchase financial assets. People have to decide how they are going to hold their money. The speculative demand for money is the amount held for the potential purchase of assets. From in this statement I save RM 150 for my future. I planned to buy a motorbike. And I want pay more for motorbike down payment at least RM1800.
TASK 3
Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers.
Like a bank account, money flows into and out of a country. When payment amounts that are outgoing and payment amounts that are incoming are equal, there is balance. As an official record, the balance of payments is broken down into two accounts the current account and the capital and financial account.
The current account deficit means running a sizeable deficit on the current account. There is a net outflow of demand and income from the circular flow of income and spending. The current account does not have to balance because the balance of payments also includes the capital account. This includes portfolio capital flows. For the example: share transactions and the buying and selling of Government debt and direct capital flows arising from foreign investment.
The capital account deficit means an imbalance in a nation's balance of payments capital account in which payments made by the country for purchasing foreign assets exceed payments received by the country for selling domestic assets. In other words, investment by the domestic economy in foreign assets is less than foreign investment in domestic assets. This is generally not a desirable situation for a domestic economy.
If, however, the current account does not balance out the capital account, then a capital account deficit contributes to a balance of payments deficit.
So, what are the factors that cause the country's problem when persistent balances of payment deficit happen? The country which is having the deficit problem will face a lot of problem. There are structural weakness, unbalance economy, potential loss of output and potential problem in financing a current account deficit.
By the side structural weakness current account deficit may be a symptom of a wider structural economic problem for example a loss of competitiveness in overseas markets, insufficient investment in new capital or a shift in comparative advantage towards other countries.
A large deficit in trade is a sign of an 'unbalanced economy' typically the consequences of a high level of consumer demand contrasted with a weaker industrial sector. Eventually these "macroeconomic imbalances" have to be addressed. Consumers cannot carry on spending beyond their means for the danger is that rising demand for imports will be accompanied by a surge in household debt.
A widening trade deficit may result in lost output and employment because it represents a net leakage from the circular flow of income and spending. Workers who lose their jobs in export industries, or whose jobs are lost because of a rise in import penetration, may find it difficult to find new employment.
Countries cannot always rely on inflows of financial capital into an economy to finance a current account deficit. Foreign investors may eventually take fright, lose confidence and take their money out. Or, they may require higher interest rates to persuade them to keep investing in an economy. Higher interest rates then have the effect of depressing domestic consumption and investment.
An additional downward pressure on the exchange rate. And large deficit in trade in goods and services represents an excess supply of the currency in the foreign exchange market and can lead to a sharp fall in the exchange rate. This would then threaten an increase in imported inflation and might also cause a rise in interest rates from the central bank. A declining currency would help stimulate exports but the rise in inflation and interest rates would have a negative effect on demand, output and employment.
The balance of payments is important because it will tell you whether a country has enough savings and other financial transactions to pay for its consumption of imports. It will also tell you if it's producing enough economic output to pay for its growth.
A country with a balance of payments deficit probably imports more goods, services and capital than it exports. It is also borrowing from other countries to pay for its imports. This can be good for a while, so the country can fuel economic growth.
TASK 4
Demand-pull inflation occurs when demand for a good or service increases so much that it outstrips supply. As demand increases, sellers start selling out of the product, and frustrate potential customers. Their next step would be to produce more. However, if supply is constrained, their next step would be to raise prices, creating inflation. Therefore, for an increase in demand to cause inflation, there must be a supply constraint; otherwise supply would simply rise to meet demand.
There are five sets of circumstances that can lead to demand-pull inflation. The first is a growing economy. When families feel confident that they will get raises and better jobs, that their homes and other investments will increase in value, and that the government is doing the right thing in guiding the economy, they will spend more instead of saving.
Cost-push inflation is a type of inflation caused by substantial increases in the cost of important goods or services where no suitable alternative is available. For example, if the price of a barrel of oil rises significantly, this could cause fuel prices to increase which, in turn, increases costs for transportation of food, tools, and other goods, which can cause some level of inflation across an economy. Cost-push inflation contrasts with demand-pull inflation, which is caused by a rise in demand on the part of consumers.
With increase in wages of employees, they get a higher purchasing power, which leads them to purchase more goods and drives up the demand and therefore, the prices. The other important factor is the fluctuation in exchange rate. If this fluctuation is not in favor of your home currency, this can drive up the cost of imports and therefore, production.
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the power of money a loss of real value in the internal medium of exchange and unit of account within the economy. Inflation's effects on an economy are various and can be simultaneously positive and negative.
TASK 5
What is money? Everyone uses money. We all want it, work for it and think about it. If you don't know what money is, you are not like most humans. However, the task of defining what money is where it comes from and what its worth belongs to those who dedicate themselves to the discipline of economics. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and want.
In above illustrations, we can identify that money is useful in several ways and hence can identify the function of money. Money is often defined in terms of the four functions or services that it provides. Money serves as a medium of exchange, as a store of value, and as a unit of account and standard of deferred payment.
Good money is something useable as a common denominator acceptable by all parties concern. Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. Two parties who have mutual need for each other goods or services and the willingness to exchange at quantities agreeable to both of them.
An additional, unit of account, the first function of money is to be a unit of value or a unit of account. The value of each good or service is expressed as a price, which is the number of monetary units for which the good or service can be exchanged. For example, if a pen is worth RM10 and a notebook is worth RM20 then a notebook is worth two pens. Further, accounting is simplified, as all items will be recorded in terms of monetary units that can be added and subtracted.
Furthermore, good money must be acceptable as a standard for deferred payment, where goods or services need to be exchangeable for money immediately. Examples of situations where future payments are to be made are pensions, principal and interest on debt, salaries etc. As long as money maintains a constant value through time, it will overcome the problems associated with making future payments with specific commodities.
Other than that, In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. If money could not be stored for some period of time and still remain valuable in exchange, it would not solve the double coincidence of wants problem and therefore would not be adopted as a medium of exchange. As a store of value, money is not unique; many other stores of value exist, such as land, works of art, and even baseball cards and stamps.
Other attributes of a good money besides scarcity. There are acceptability, durability, divisibility, cognizability, homogeneity, and portability.
First of all is acceptability. It means willingness of others to receive it as payment. In terms of a form of currency being accepted within society, money must be accepted by everyone in the economy. This acceptance is for the purpose of the exchange of money for goods and different types of services. Other than that, the essential quality of a good money material is that it would be acceptable to all without any hesitation in exchange for goods and service
Divisibility it means ability to break into smaller units of account. The commodity chosen as money should be capable of being re-united without losing its value. The small units of money are needed for making the smallest payments. People will only need as much money as is necessary for their purchases, therefore it is necessary for money to be easily broken down for different types of transactions.
Durability means by ability to physically maintain its value. The money must not lose its value with the passage of time. Metals are most durable as compared to other forms of money. The gold and silver do not wear out quickly but it can be treated as durable due to replacement by the bank.
Furthermore quite simply it is necessary for money to be easily transported so that people can carry it around with them on a daily basis. This also allows for the ease of transaction so that money can be transferred from one place to another. It has convenience of carrying lot of money.
Other than that, homogeneity means, each unit should have similar value as the next. Good money must also be homogeneous that is, the commodity from which it is made must be of the same quality wherever it is found. Obviously, cattle possess this characteristic to a very low degree, for scarcely any two of them are alike. Even the Divisibility, which is closely related to homogeneity, simply means the capability of a commodity to be divided without destroying its value.
And the Congnizability means, by this name we may denote the capability of a substance for being easily recognized and distinguished from all other substances. As a medium of exchange, money has to be continually handed about, and it will occasion great trouble if every person receiving currency has to scrutinize, weigh, and test it. If it requires any skill to discriminate good money from bad, poor ignorant people are sure to be imposed upon. Hence the medium of exchange should have certain distinct marks which nobody can mistake.
Physical characteristic of good money is portability. The commodity that serves as money must be moved from point to point, among the members of the society that uses it. Otherwise it is not money. This movement involves labor and expense. Hence, the commodity that combines greatest value in the smallest bulk, if we consider portability alone, is the most desirable as a medium of exchange.
CONCLUSION
Given the enormous scale of government budgets and the impact of economic policy on consumers and businesses, macroeconomics clearly concerns itself with significant issues. Properly applied, economic theories can offer illuminating insights on how economies function and the long-term consequences of particular policies and decisions. Macroeconomic theory can also help individual businesses and investors make better decisions through a more thorough understanding of what motivates other parties and how to best maximize utility and scarce resources.
