Questions on Macroeconomic Environment Homework Help

1. Why is private investment spending so variable? How can policymakers try and stabilise it?      

The objective behind private investment is to make profits. This therefore means that a firm is always attracted to a specific line of production by the profits it anticipates to make at the end of the production exercise (Arnold, 2008). If a firm engages in specific line of production and its anticipations do not materialize, then its interest in that line of production reduces as it tries to find other attractive sectors of the economy. If more attractive ventures are identified, then the concentration of the firm shall shift from one line of production to the next. This thus affects the investment criterion of private investors.

The investment of private firms can be stabilized in a single line of production if the government introduces incentives, it subsidizes the production process, improves the communication and transport network. At the same time if specific laws and rules that guide the entrance and exit of firms in a specific line of production are enacted, then investment spending by private investors can be stabilized.

2. What were the key differences Between Keynes’s theory of income determination and that of the classical economists? Why did Keynes think that the market system could     break down?              

According to Keynes in his theory of income determination national, income level is primarily determined at that point where aggregate supply and aggregate demand are equal (Atkinson, 1998). Noteworthy is the fact that the consumption function is the most crucial component of the aggregate demand in this theory of income determination (Atkinson, 1998). One thing that separated this theory from the classical economists’ assertion is the fact that equilibrium can occur at any employment level which is not the case with classical economists’ postulation.

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