Reference no: EM131606730

1. What are the main determinants of aggregate spending in the economy? How does each spending category vary over the business cycle? In your answer, make sure you relate spending to unemployment and inflation.

2. Explain why the distinction between real and nominal interest rates is important for investment and saving decisions.

3. Imagine you have just heard a business owner making the following claims:

My business operates with a few employees who are very loyal and just get on with the job they are qualified to do, unlike the unemployed layabouts drawing on my tax dollars. We don't have any debt, so bank announcements about interest rates don't have much relevance, and we don't operate in foreign markets, so exchange rates are of little consequence to us. This is not Zimbabwe, so inflation is never a problem. So, quite frankly, my little business is pretty isolated from macroeconomic fluctuations and other macro realities.

***Discuss this statement with a view to outlining why knowledge of macroeconomic conditions provides an important context for any business decision process.

4. Consider the following:

Since GDP = C + I + G + Net Exports, it stands to reason that when C and I are low in a recession and net export spending is essentially dependent on foreigners, the only stimulatory policy open to government is via G through changes in its budget.

Do you agree? Justify your answer.