PRINCIPLES OF MACROECONOMICS

QUESTION NO:1
How does Personal Income differ from National Income?
ANSWER:
Personal income and national income are both important measures used in economics, but
they represent different concepts and perspectives. Personal income refers to the earnings
received by individuals from various sources, like wages and investments, over a specific
period. Personal income is relevant from the perspective of individuals and households. It
reflects the income that individuals have available for consumption, savings, and investment
after accounting for taxes and other deductions. National income, on the other hand,
represents the total value of all goods and services produced within a country's borders
during the same period, including income earned by individuals, businesses, and the
government. National income includes not only income earned by individuals but also
income earned by businesses and the government sector within the country's borders. It
measures the overall economic performance and productivity of a country, indicating the
total output generated by its economy.
QUESTION NO:2
Explain the relationship between Government purchases and Financial Markets.
ANSWER:
Government acquisitions may have a big impact on financial markets due to their size and
economic impact. Increasing government spending on products and services frequently
results in more demand throughout the economy, which can propel economic expansion.
The financial markets may be impacted by this increased demand in a number of ways.
a) Interest Rates:
Purchases made by the government can affect interest rates. Interest rates may rise if the
government borrows more money to pay its increased expenditure, as this might raise
demand for loans. An increase in interest rates may draw money to bonds and other fixed-
income instruments, which might have an impact on the value of stocks and other assets.
b) Inflation Expectations:
Higher government expenditure may have an impact on inflation predictions. Bond yields,
stock prices, and currency values may fluctuate if investors modify their portfolios in
anticipation of rising inflation brought on by increased government purchases.
c) Market Sentiment:
The attitude of the market can also be impacted by government acquisitions. Favorable
opinions of government expenditure initiatives, particularly those meant to spur economic
expansion, have the potential to bolster investor confidence, raise stock prices, and
stimulate market activity.
In general, there is a complicated and delicate interaction between government investments
and the financial markets, with market dynamics and investor behavior being shaped by
government activities.
QUESTION:3
What is the difference between Personal Income and Disposable Personal Income?
ANSWER:
Personal income and disposable personal income are two related but distinct concepts in
economics:
a) Personal Income:
Personal income refers to the total amount of income earned by individuals from all sources
before taxes are deducted. It includes wages, salaries, rental income, interest, dividends, and
other sources of income. Personal income is a broad measure of an individual's earning
capacity and represents the money received by individuals and households within a given
time period.
b) Disposable Personal Income (DPI):
Disposable personal income, on the other hand, is the amount of money that individuals
have available for spending and saving after personal income taxes have been deducted. In
other words, it is the income that individuals actually take home and can use for
consumption or saving purposes. Disposable personal income accounts for taxes paid to the
government and excludes taxes such as income taxes, social security taxes, and other
mandatory deductions.
In summary, while personal income represents total earnings before taxes, disposable
personal income reflects the income available for consumption and saving after taxes have
been deducted.