Its purpose is to explain the formation of prices in different markets seen in the economy, determining the balance between goods and services. While these 2 studies of economics appear to be different, they are actually interdependent and complement one another, because a macroeconomic process consists of a series of microeconomic processes (Sloman & Garrat, 2013). Both macro and microeconomics should be studied together in order to understand how companies operate and earn revenues, how an entire economy is managed and sustained. 2.2 Equilibrium in the economy Equilibrium means a position of stability. In macroeconomics , equilibrium in the economy will occur when the aggregate planned demand for goods and services equals the aggregate supply of these products (Gillespie, 2011).
Given a fixed exchange rate, the relationship between the demand and supply of nominal money is a crucial determinants trade balance. Disequilibrium in trade balance can be manifested through money market disequilibrium. This approach assumes that for any nation over a long run, the demand for money as a stock is stable and linearly depends on real income. That
Explain what is meant by the term “an economic model” and outline a model of price and output determination in a free market. Examine the effect of a change in real disposable income on equilibrium price and output. An economic model or theory is a simplified explanation and analysis of economic behaviour. It allows us to predict, and therefore intervene, if we do not like the outcome of a possible chain of events. Theories and models are mainly derived from past responses to similar stimuli or from statistical surveys, and this information may not always be accurate as it assumes ceteris paribus, or all other things remaining equal.
For analysis during the short-run, monetary economics is a central part of macroeconomics. The main paradigm of the macroeconomics is the Classical and Keynesian ones. The classicalist studies the competitive economy at its full employment equilibrium, while the Keynesians focuses on its deviations away from this equilibrium. (Jagdish, 2009)
As a result, commodity arbitrage or buy a commodity at the same time the lower price and sell at the higher prices will lead back to the equilibrium exchange rate. The FPM, SPM, and RIRD known as model monetarists exchange rate determination. Demand and supply of money is a major determinant of the exchange rate. They also assume that domestic and foreign bonds are equally risky to their expected returns will be equalized which covered interest parity will prevail. Assuming wages in the labour market and commodity prices in the goods market to be perfectly flexible PPP theory continued to hold and the expected return between domestic and foreign bonds with the same risk and the same maturity, FPM argue that the relative money supply, inflation expectations, and economic growth as the primary determinant of the exchange rate in the economy.
In this situation, acquisition of either corporation is worthwhile since each has an IRR greater than their respective discount rates, but since IRR gives the project’s compound rate of return, the project providing the higher compound rate of return should be selected which means that Corporation B is preferred to Corporation A. Both NPV and IRR analyses support the acquisition of Corporation B. In cases where a conflict exists between NPV and IRR as to which competing projects to choose, the project with the larger NPV should ... ... middle of paper ... ..., the main concern should be on how the investment will affect the value of the firm’s stock more so than how long it takes to recover the investment that presupposes that the project does add value for stockholders. When using the payback period as a criterion for capital budgeting decision, it is better to use the discounted payback as it takes into account the time value of money although still inferior to NPV. In both projects, the initial cost is recovered even after discounting the cost of capital.
-The Keynesian position is that saving and investment plans can be at odds and thereby can result in fluctuations in total output, total income, employment, and the pricelevel. -The amount of goods and service produced and therefore the level of employment depend directly on the level of total or aggregate expenditures. -A consumption schedule indicates the various amounts households plan to consume at various possible levels of disposable income which might prevail at some specific point in time. -Because disposable income equals consumption plus saving (DI=C+S) you need only subtract consumption from disposable income to find the amount saved at each level of DI. -Break-even income is the level at which households consume their entire income.
For Pronto PLC, Strategy 2 is accepted because of ARR is greater than the ROCE. ARR evaluates the average profitability of the project as against the average initial investment made. The decision taken in this case is in line with the return value on the assets (Wimalarathna, 2013). This method recognizes the profitability factor of the investment. It is important for a firm while considering a capital investment project, to take note of these methods’ advantages and disadvantages.
Acid test ratio is a liquidity ratio that shows the ability of a company to pay off its current liabilities with quick assets. The acid test ratio is a better measurement than current ratio as it provides a more rigorous assessment of a firm’s ability to pay its current liabilities. Current assets that are not readily convertible into cash are excluded from the calculation of acid test ratio such as inventory. These assets are being eliminated because their conversion into cash may take considerable time. Acid test ratio is important as it used to evaluate whether a company has sufficient cash to pay for immediate obligations.
NPV and IRR) is the best choice. If acquisition does not generate positive cash flow, the company is effectively providing finance for the acquired corporation. Capital Budgeting Decisions Many business opportunities involve sacrificing current earnings for future profits (opportunity cost). For the acquisition to be worth pursuing, it must generate a higher rate of return than what could be earned in the capital markets (Jaffe et al., 2002:200). When assessing capital budgeting projects, financial decision makers typically use discounted cash flow methods such as Net Present Value (NPV) or Internal Rate of Return (IRR).