Macroeconomic Economics Case Study

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Question 1 1.1 The three basic purposes of macroeconomic theory are ideas on how things work. (Mohr, 2012, p. 12) Explain how everything may be connected in the actual business world. Predict and foresee possible changes that may occur in the immediate or distant future with relative accuracy. Serve a basis for analysing and forming decisions towards the economic policy. (Mohr, 2012) 1.2 1.3 Households provide the labour and capital (factors of production) at the factor market where by all those factors are purchased by the firms and joined to create goods and services for the goods market. The government’s main functions are to pass laws, collect taxes. The government then also buys a section of the GDP to account as government purchases…show more content…
Therefor if a households income increased then their marginal propensity to consume increases. This means that a house hold will consume more when they earn more, however they will also increase their marginal propensity to save. Savings are considered to be a leakage into the circular flow of income as money is removed from that flow. The increase in spending will affect firms to increase their production in a ratio of 1:1. This means that if the households consume R100000 then the firm’s production will also increase by R100000. The increase in production will also mean another R100000 will go to the households as income. However the marginal propensity to save will mean that the household may now only put in R70000 rand and therefor mean that the firms increase in production will also increase by R70000 and savings will increase by R30000. This means that it cannot go on forever. (lostmy1,…show more content…
This is done by keeping the compliance and administrative costs as low as possible. Compliance costs constitute the people hired and pay for services used to help taxpayers manage and pay their taxes. Administrative costs are costs incurred by the government when they employ people to collect and assess taxes. If the tax system is complicated it will enquire higher costs and offer taxpayers with certain “tax loopholes” and allow for people to avoid paying their taxes. Although this is legal it puts a huge strain on the government’s revenue. It also upsets people who can’t avoid tax. Tax evasion and tax avoidance are very different, tax evasion is when a person deliberately doesn’t pay the taxes they have been levied with and this is illegal. (Mohr, 2012, p.

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