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Macroeconomic problems arise when the macroeconomy does not satisfactorilyachieve the goals of full employment, stability, and economic growth. Unemployment results

when the goal of full employment is not achieved. Inflation exists when the economy falls shortof the stability goal. These problems are caused by too little or too much demand for

gross production. Unemployment results from too little demand and inflation emerges with too

much demand. Stagnant growth means the economy is not adequately attaining the economicgrowth goal. Each of these situations is problematic because society is less well off than it wouldbe by reaching the goals.

Unemployment arises when factors of production that are willing and able to

produce goods and services are not actively engaged in production. Unemployment means theeconomy is not attaining the macroeconomic goal of full employment.While attention is usually

focused on the unemployment of labor, such as the time Pollyanna Pumpernickel was laid offfrom her job at the OmniMotors Car Company, any of the four factors of production can suffer

unemployment. For example, The Wacky Willy Company might be operating one of its StuffedAmigos factories at half capacity or Herb Haberstone might leave a section of his

farmland uncultivated. Unemployment is a problem because: Less output is produced and thusthe economy is less able to address the scarcity problem. And the owners of unemployed

resources receive less income and thus have lower living standards.Inflation arises when the average price level in the economy consistently and

persistently increases. In other words, prices generally rise from month to month and year toyear. With inflation the economy is not attaining the stability goal. Inflation is an average

increase in prices, with some prices rising more than the average, some rising less, and someeven declining. As such, not every member of society is likely to experience exactly the same

inflation. Inflation is a problem because: The purchasing power of financial assets suchas money declines, which reduces financial wealth and lowers living standards.

Greater uncertainty surrounds long-run planning, especially the purchase of durable goodsand capital goods. Income and wealth can be haphazardly redistributed among sectors of the

economy and among resource owners.Unemployment and inflation tend to vary with business-cycle instability. At some

times, unemployment is less of a problem and inflation is more. At other times, unemployment ismore of a problem and inflation is less. Consider how these two problems connect to the two

primary phases of the business cycle. Contraction: The contraction phase of a business cycle ischaracterized by a general decline in economic activity. Aggregate demand is less, meaning less

output is produced, and thus fewer resources are employed. For this reason, unemployment tendsto be a key problem. However, because markets are more likely to have surpluses than shortages,

inflation tends to be less of a problem. Expansion: The expansion phase of a business cycle ischaracterized by a general rise in economic activity. Aggregate demand is higher, production is

greater, and more resources are employed. Demand for production often outpaces the ability tosupply the production. Under these circumstances, because markets are more likely to have

shortages than surpluses, inflation tends to be the primary problem. However, with robustproduction and jobs aplenty, unemployment tends to be less of a problem.


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The third problem of stagnant growth arises because the supply of aggregateproduction is not increasing at a desired pace or is even declining. An increase in the total

production of goods and services is generally needed to keep pace with an increase in thepopulation of society and expectations of a rising living standard. Stagnant growth exists if total

production does not keep pace. This means the macroeconomic goal of economic growth is not

attained.

Reasons for stagnant growth can be identified with a closer look at the quantity and

quality of the resources used for production. Quantity: The available quantities of the four factorsof production--labor, capital, land, and entrepreneurship--can restrict the growth of production.

The quantity of labor is based on both the overall population and the portion of the populationwilling and able to work. Should either decline, then growth is not likely to keep pace with

expectations. If, for example, Edgar Millbottom decides to quit his job and spend his time doingnothing but vegetating on his parents living room sofa, then the total quantity of labor declines.

The quantity of capital depends on the amount of investment expenditures relative to

the depreciation of the existing capital stock. If investment expenditures should decline ordepreciation increase, then the economy is less likely to grow. If, for example, restrictive

government regulations and high taxes discourage The Wacky Willy Company and similarmanufacturing companies from building new factories, then the total quantity of capital

declines.Quality: The quality of the four resources can also lead to stagnant growth. The twomost noted resource quality influences aretechnology and education. The lack of technological

progress, which could result from allocating fewer resources to scientific research can limitincreases in the quantity of resources. Along a similar line of reasoning, allocating fewer

resources to education can also limit resource quality.


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Name: Ooi Wan Sheng

Student ID: SAM11041

Question: Evaluate the effects of economic growth

on the macroeconomic

Word Count:862

Lecturers name: Mrs Lucy Teh


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Referenceshttp://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=macroeconomic+problems

http://www.highbeam.com/doc/1O19-externalbalance.html

http://www.rba.gov.au/publications/rdp/2003/pdf/rdp2003-03.pdf

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