Fundamentals of Macroeconomics
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ECO/372
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Teacher

Fundamentals of Macroeconomics
The economy is nothing if not extraordinarily complicated. It is intertwined with everything and almost seems as if Newton’s third law applies to it as well. Even the smallest of matters can have a large implication across the economy. The butterfly effect also comes to mind. This paper will evaluate a few of the common activities that can happen within a society, and how those common activities can affect the home, business industry, and government.
Purchasing of groceries Grocery prices are on the rise. Not long ago diesel fuel was $4.00 a gallon. This is the method in which all groceries are harvested and/ or transported. An increase in the cost of fuel caused an inflation in grocery prices to reflect a “fuel surcharge” grocers were incurring from transportation companies. Farmers are on the decline as well (Parker2011). Farmers are getting older and selling the farm land instead of passing it on to their sons. If the demand is the same or growing and the supply lessens, the price will rise.
When a person purchases groceries, the effects to businesses and households may be fairly obvious. The money that person spends on those groceries decrease their cash flow and increase their inventory of the home. This trade of cash for goods benefits many businesses. The goods purchased will benefit the grocer who is making a profit on the mark up of the goods. The manufacturer of the goods will receive another order from the grocer to replace the inventory, and that will in turn cause the manufacturer to seek out the needed resources to make those goods. This keeps people employed who will use that money to go to the grocery to buy food and goods.
The government is affected also, but not in such a direct way. Groceries are non-taxable items, so it does not directly make money from such a sale. However, if it is good for businesses it is generally good for the economy, which in turn is good for the government. The general wellbeing of the economy is of vital importance for the government. However don’t fret for the government not making money. Businesses pay taxes on their profits whether they sale groceries or other items. So the income tax generated from the businesses will directly affect the government. While the government isn’t making money of the residential sale, it can make money from the commercial sale and profit.

Massive layoff of employees This is bad on many levels and good on a few too. In 2008 there were many auto manufacturers laying off employees and shutting down plants. We can see what happened vividly. When unemployment increases it causes a strain on all local businesses. The employees who were laid off can no longer spend the money they want to spend because their household has less to no income. They become frugal in their lifestyle and business get hurt simply because no one can afford to buy their product. This can in turn cause more layoffs and even more frugal spending activity. It doesn’t take long to see a trend develop which causes a recession and possibly even a depression. It should be noted that the company that laid off the employees in the beginning, may see a noticeable savings in the short term, but in the long term their business will be affected by the recession that their layoff started. So it is in the best interest of the government to avoid these things if at all possible. If the people are unemployed, there is no income tax. If people can’t afford to spend money, there is no sales tax. It also leans heavily on the social services in these situations. Many people drawing unemployment will increase the outflow of money for the government. It is important to remember that when money stops circulating, economies die (Solans 2003).

Decrease in taxes The George W. bush tax cuts are an example of what can happen to an economy when a massive decrease in taxes take place. The country’s economy responded like a large elephant being poked with a small stick. Getting everyone to agree on the benefits and drawbacks is impossible. There will always be dissenters, and for every pro there will be someone shouting a con or a reason why the pro isn’t a direct result of the enacted policy. Time should tell and we may be too close to really be able to tell what happened economically as a result of the tax cuts. I for one as a middle class employee rather enjoyed it. If the government decreases the amount of taxes, the obvious conclusion is that it will make less money. However that is not entirely true. It is the same thought as decreasing the profit margin on merchandise. Sell more of that item at a lower cost to achieve higher revenues. If the government were to do that, households would have more money to spend, which in turn increases the revenue of businesses and increase the amount of sales tax generated. The increase in revenue for the business, then directly affects the amount of income tax they will have to pay to the government. This model can be extrapolated out to the hiring of more employees to account for demand, which would mean that household has increased its spending capacity. Thus the growth cycle can trend until the balance is reached. However, as was seen in the Bush tax cuts things are never as simple as they could be.

References
Solans, E. D. (2003). Why does the structure of the financial system matter?. Retrieved from http://www.ecb.europa.eu/press/key/date/2003/html/sp030613.en.html
Parker, T. (2011). 5 Economic Changes That Fatten Your Grocery Bill . Retrieved from http://www.investopedia.com/financial-edge/0111/5-economic-changes-that-affect-your-grocery-bill.aspx