Running head: Fundamentals of Macroeconomics

Fundamentals of Macroeconomics Student Name Principles of Macroeconomics/ECO372 Date Instructor Name

Fundamentals of Macroeconomics Fundamentals of Macroeconomics he !nited "tates econom# di$ides into three sectors%

hese are go$ernment& household&

and 'usiness (Colander& 2)1)*% +ouseholds suppl# the la'or force to the 'usinesses and the go$ernment for e,change of financial pa#ments% -usinesses sell the goods and ser$ices that the household la'or force 'uilds to other households& 'usinesses& and the go$ernment (Colander& 2)1)*% a, re$enue from households and 'usinesses fund go$ernment programs and pa# for

goods and ser$ices 'usinesses pro$ide% .ith these ta, re$enues the go$ernment creates la/s and programs to o$ersee the sell and trade of goods and ser$ices /ithin the mar0et (Colander& 2)1)*% Purchasing of Groceries .hen a household purchases groceries man# things happen% re$enue to a 'usiness for the product purchased% he household pro$ides

he re$enue a 'usiness recei$es goes to

creating more products& 'uilding upon the e,isting products& and to create 1o's for households% he go$ernment collects ta,es on the purchase of the product as /ell% he ta,es go to creating

la/s and programs that go$ern the production and sale of the products among man# other go$ernmental programs% Massive Layoff of Employees Emplo#ee la#offs ha$e a strong ad$erse affect on all three of the economic sectors% .hen a 'usiness must la#off a ma1or part of the /or0force households 'egin cur$ing spending% he reduction in /or0force means less income ta, dollars to the go$ernment as /ell as a reduction in sales ta, /ith the reduction in purchases% 2o$ernment social programs also ta0e a hit in unemplo#ment ser$ices& thus reducing the go$ernment 'udgets e$en more% he 'usiness

mar0et is then flooded /ith a /or0force of similar talents and e,perience causing a ripple of o$er3ualified 1o' candidates% he financial panic triggered '# declining /or0force /ill shift the 4ggregate 5emand (45* as households /ill spend less in response to a reducing 1o' mar0et%

Fundamentals of Macroeconomics his situation puts a strain on all economic sectors% Decrease in Taxes .hen the go$ernment decreases ta,es man# scenarios ma# occur% +ouseholds 'egin to purchase more /ith the ne/found purchasing po/er% -usinesses produce more in response as /ell as gain the a'ilit# to place more funds to/ard e,pansionar# policies and further 1o' creations% he decrease in ta,es creates a /hirl/ind of gro/th in these t/o economic sectors%

he go$ernment ho/e$er /ill re3uire cutting 'ac0 on some programs and spending to maintain a proper 'udget% his t#pe of e,pansionar# fiscal polic# is normall# made in an attempt to shift

the 4ggregate 5emand (45* cur$e to the right there'# increasing the actual income potential and decreasing interest rates% onclusion 4s seen e$er# economic acti$it# has a direct affect on another% Each of the three sectors of the !nited "tates econom# affects the other /ith e$er# action% "omething as simple as purchasing groceries dictates /hat 'usinesses /ill pro$ide the consumers as /ell as fund different programs for the go$ernment through sales ta,% Massi$e emplo#ment shifts ha$e a strong hold on go$ernmental 'udgets as /ell as economic sta'ilit#% .hen a large /or0force is left unemplo#ed households panic and 'egin sa$ing more and spending less% his creates a

reduction in aggregate demand that has the a'ilit# to affect pricing if the unemplo#ment issue is not resol$ed s/iftl#% 2o$ernmental e,pansionar# action to decrease ta,es /ill create 'etter opportunit# for 'usinesses and households to use funds less sparingl# there'# e,panding the econom#% Reducing go$ernmental programs and ta,ation creates gro/th in the 'usiness and household sectors of the econom# '# allo/ing these t/o sectors to 0eep their funds /or0ing for them rather that supporting go$ernmental programs%

Fundamentals of Macroeconomics

Fundamentals of Macroeconomics References Colander& 5% C% (2)1)*% Macroeconomics (8th ed%*% -oston& M4: Mc2ra/9+ill/:r/in%