Essays on Answer Questions Assignment

Tags: Money
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1. An economy goes through ups and downs which are referred to as expansion and recession phases. These phases have an effect on the overall growth of the economy which is reflected on the level of employment, inventories, money in the system and plant utilization. The different phases of a business cycle is shown below (Business Cycle. 2012)The economy shows different results in different scenarios. Considering the expansion phase which is one where the economy is growing at a rapid pace. During this phase people in the economy have a positive sentiment and are of the view that the income level will rise in the future.

This results in increased spending and less of savings. Increased spending results in more money in the economy and the increased demand for goods and services makes the manufacturer to produce more of the goods and services. To produce more goods and services more people have to be hired which results in a reduction in unemployment. The fact that the capital requirement cannot be changed in the short run and requires some time before making changes in the capital requirements the manufacturing units have to ensure that more and more employees are employed which makes the machinery and other capital units to run at maximum capacity utilization (Mayerhoefer & Zuvekas, 2008).

The overall effect is such that it results in increasing the demand for goods and services as the employees who are compensated for their services look towards purchasing the goods and services from the market. This results in a cyclical effect and continues till a point where the goods are produced at maximum capacity and after that result in an increase in the price level due to additional demand for goods and services which can only be compensated by an increase in price as shown below (Garg, 2010)Thus, in case of expansion phase the economy witnesses widespread growth and results in reducing the unemployment level, the inventories level come down and the entire industry is able to operate at maximum capacity which ensures positive growth rate and the economy is able to move at a faster growth rate. Considering the recessionary phase which is one where the growth rate of the economy is continuously falling.

During this phase people in the economy have a negative sentiment and are of the view that the income level will fall in the future. This results in decreased spending and more of savings. Decreased spending results in less money in the economy and the decreased demand for goods and services makes the manufacturer to produce less of the goods and services. This results in people loosing jobs and the unemployment level starts to rise. The fact that the capital requirement cannot be changed in the short run and requires some time before making changes in the capital requirements the manufacturing units have to ensure that less and less employees are employed which makes the machinery and other capital units to run at lower than maximum capacity utilization.

The overall effect is such that it results in decreasing the demand for goods and services as unemployment level is high and people fear the same in the near future due to which they start to hoard money. This results in a cyclical effect and continues till a point where the goods produced are decreasing and results in piling up of inventory along with the additional pressure of job losses and reducing prices so that the goods which are produced can be sold (Colell, Winston, Michael & Jerry, 1995).

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