macro foundation in finance
macro foundation in finance
Details of coursework
You are required to write an essay independently on an assignment that is related to the materials covered.
Aims and Objectives of the Assignment
To demonstrate an understanding of the relevant economic ideas or theories
To apply economic theory to real world situations
To write a structured, coherent and fluent essay
The Chancellor of the Exchequer is about to formulate his last budget before the General Election. He has received the following letter from the Prime Minister and
forecast from the Treasury.
Soon the Chancellor is expected to present his policy to the Prime Minister and your task is to prepare the Chancellor for the meeting by providing him with the
answers to each of the points raised in the Prime Minister’s letter. You will probably find that you can best deal with the problems by applying the techniques of
analysis presented in the lectures so far that is by dividing total demand into its components and calculating the relationship between each component and total
A letter from the P.M. to the Chancellor of the Exchequer
The Chancellor of the Exchequer
1. The success of your forthcoming budget will be a crucial factor in the next election.
2. Do you expect next year’s demand to be so large that there will be a labour shortage or do you expect output to be so small that there will be unemployment?
3. I see that the National Institute has forecast unemployment on the basis of unchanged government policies. If this is the case, it is imperative that we adopt
a policy to produce full employment next year.
4. It seems to me that we have to choose between increasing government expenditure or reducing taxations. We should choose the option which causes the smaller
increase in the budget deficit.
5. You will of course ensure that the attainment of full employment does not run us into a balance of payments deficit.
Economic forecasts and prospects for the next fiscal year
Consumers’ expenditure is expected to reach an annual rate of £1 million plus 3/4 of personal disposable income.
It appears that firms are now entering the final phase of their investment programme so that investment is likely to be somewhat lower that in the past. It is also
unlikely to be at all sensitive to current levels of output. Our forecast is for a level of gross domestic fixed capital formation of £4 million.
Government activity in the economy is limited to direct expenditure on goods and services and the raising of revenue through the taxation of incomes.
Existing government programmes are likely to lead to an expenditure on goods and services of £4 million. Present levels of taxation are likely to yield to the
government a sum equal to 20% of national income.
Productivity has increased a little since last year so that, if the economy were to attain a position of full employment, its gross domestic product would be £20
The International Situation
The recent international monetary crisis has somewhat checked the growth of world trade so that exports are unlikely to exceed £2 million. Imports will represent about
20% of gross domestic product.
Guideline for completing the assignment
1) Independent research of the topic is a crucial part of the exercise. Simply reproduce lecture notes and textbook materials will attract a low grade. Evidence
of wide reading, your own synthesis of different sources, independent thinking and analysis will be generously rewarded. The more widely you read the greater your
understanding of the breadth and depth of the questions. Submissions will be marked down if they rely heavily on only one source or if they fail to fully reference the
source of their material. At least THREE different sources should be used in your essay.
2) State your assumptions clearly (for example, whether the results are derived from the Keynesian or classical assumptions). Use diagrams and algebra wherever
necessary to clarify the discussion.
3) The total length of the essay should not exceed 2000 words. You should include a word count at the end of the essay.
4) The essay should be typed in a word processor and double-spaced between two consecutive lines.
Do not simply copy and paste materials from existing sources! – It is easy for you to do so, but it is also easy for you to be caught and disciplined. All quotations
must be clearly referred to and, if references to the literature are used in the assignment, a proper bibliography must be included. The Harvard System for referencing
should be adopted. If you do not know the Harvard System, you should consult the Information Resources section, that is
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