ECO320 Coursework Questions – Coursework Example

WORK: MACRO AND MICRO ECONOMICS Insert Insert Expectations and their importance in macroeconomic models The expectation is what is considered most likely to happen in future based on the performance of something, either by use of earlier information or current information. Expectations are very crucial in macroeconomic models, as they play important in an economy. It is used to predict the effects of anticipated and unanticipated changes and the effects that result when the changes are expected to be temporary as compared to when are expected to be permanent. It also helps in meeting economic policy goals and creates economic stability as are used to predict future levels of inflation, future levels of employment and other key economic indicators, which affect the decisions made day by day by governments.
Are people expectations constant when inflation rate changes over time?
According to me, people expectations are not consistent with inflation rate changes over time. These are because people have inflationary expectations whereby if there is an increase in change of inflation buyers expect the inflation will decrease in future and wait to purchase in the future. In addition, when the inflation rate change decreases buyers tend to buy more goods as they expect the changes to inflation to rise in future.
Economic Interdependence
Country’s savings, government budget deficits, its domestic investment in physical capital and its foreign investment all are related in one way or other. Country’s savings results from domestic savings and savings from and other services that are used to run the country and is affected by the other three factors mentioned above. Government budget deficits affect the savings of a country as it involves more spending than the revenue available to pay for a particular time, and this affects the government savings negatively.
Domestic investment in physical capital results to more savings in a country as it leads to capital formation from capital stock such as equipment and buildings, which increases capital expenditure. Foreign investment also increases the country’s savings as it leads to the construction of new facilities, which are used for investment purposes thus increasing country’s revenue.
Blaug, Mark (1985). Economic Theory in Retrospect. Cambridge, United Kingdom.
Bouman John (2011). Principles of Macroeconomics. Maryland, Columbia.