In: Economics
1. As a macroeconomic analyst, you have been tasked to present some insights into the impact of macroeconomic variables on business performance to a business forum.
Using relevant examples from an organization or sector of your choice, discuss how the following macroeconomic variables affect the growth and/or decline of businesses: [25 marks]
a. A fall in interest rate;
b. High government spending;
c. High unemployment rate ;
d. High Inflation ;
e. Increasing GDP;
2. Use the AD-AS model to explain and illustrate, from a theoretical perspective, that by choosing the right combination of measures (policies) it is possible for the economy to grow without it experiencing inflationary pressures. Which macroeconomic policies are critical in ensuring that the price level does not increase? (N.B: In your answer, discuss a minimum of 4 examples of macroeconomic policies that can be adopted) [25 Marks]
3. Using a case study of an organisation, describe the nature of business of the selected organisation and explain the impact of fluctuations of the exchange rate on business performance. Identify and explain three factors that may have contributed to exchange rate volatility in your country during the last 12 months and three approaches that can be adopted by the business to minimise the negative impact of exchange rate volatility. [25 Marks]
Answer-2
AD-AS model is very simple. It explains the relationship between Price (on Y axis) and output (GDP, on X-axis) and wherever the Demand and Supply curves meet, thats where the current level of prices and GDP (hence the economy) is. The graph below shows a typical AD-AS model
In the graph that if demand moves faster to the right than the supply (because of economic growth etc.), prices would rise. Or if supply decreased even though demand was the same (supply curve moved to the left), prices would rise. In the long run, though, the supply curve is called Long Run Aggregate Supply (LRAS) and is vertcial, because it represents potential output of the economy. This is shown below:-
Its pretty clear that if Supply can keep up with the demand, there would be no rise if prices. So what policies can be used to do just that? Below are the possibilities-
Answer-3
Example of Fiat, the car manufacturer. Fiat has a very big automobile manufacturing plant in Asangaon, India. The plant produces various cars like Punto, Linea etc but the most important car being produced there is the Jeep Compass. Fiat produces this for the Indian market as well as other markets such as Australia. Around 65% parts of the Compass are locally sourced or manufactured in India, rest come from different markets such as Germany, Mexico, US etc. This makes it a unique case study as far as exchange rates are concerned. Because when the rupee appreciates (become stronger as compared to the Dollar), the export to other countries become cheaper. Lets say the local parts of the car were costing 40000 dollars, which at 70 ruppes per dollar would come to around 2800000 rupees. If the rupee appreciated to 60, it would then come to 2400000 only. But Rupee appreciation has a reverse impact on the other 35% parts being imported. They are now more expensive! Inverse will happen if the Rupee depreciated. It would make exports more expensive and imports cheaper.
The final impact of the appreciation or depericiation, hence, depends on how much Fiat is importing and exporting.
Factors that affected the fluctuations-
Approaches that can be adopted by the business to minimise the negative impact of exchange rate volatility-
Note:- Please post question 1 as seperate question