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PBA4801 Assignment 2 – Economics for Managers
Postgraduate Diploma in Business
Administration
PBA 4801 – Economics for Managers
Assignment 2: Macroeconomics
Lecturer: Dr. B. Muchara
Submission Date: 9 April 2018
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PBA4801 Assignment 2 – Economics for Managers
ABSTRACT
In this assignment I will be researching the various macroeconomics aspects that influence the economy, but
most importantly I will be looking at how it will influence the organisation. I will be using a small chemical
company as my example to explain the situations, let us call the company ABC Chemicals.
QUESTION 1
A FALL IN INTEREST RATE
The interest rate of an economy has a direct impact on the disposable cash available to spend by the
customers. When the interest rate increases the economy pays a higher amount back on loans. This also
makes it more difficult for the company to finance its operations.
When the interest rate decreases the economy pays a smaller amount back on the final value of a loan. It
will cost a consumer less to borrow the money when the interest is low, allowing a higher value of disposable
income for the customer.
A decrease in interest rates will affect all businesses:
1. Business Planning
a. If the interest rate drops the company will have more disposable income available to put
towards growing the business.
2. Cash Flow
a. The company will have more disposable income available if they are paying less towards
interest on previous loans, they can thus decide how they would like to spend the extra
disposable income, be it towards business planning or paying off debt sooner.
3. Customer spending and saving
a. Customers with debts have additional income to spend because they are paying less interest
to moneylenders. Sales upsurge as a result. Firms with overdrafts will have lower costs since
they must now pay less interest.
(Duff, 2015)(Kim Jenson, 2015)
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PBA4801 Assignment 2 – Economics for Managers
To give an example of the influence of an fall in interest rate, let us say that ABC Chemicals as been
functioning on its own capital for the last two years, and they have no loans at the moment, they have been
wanting to expand their packing facility but they have not had the capital available, they now discover the
interest rate has been reduced and see an increase in sales, with this new increase in sales they decide it
would be a good time to take a loan from the bank to increase their packing facility and thus increasing the
company’s output to meet demand.
HIGH GOVERNMENT SPENDING
All economies require some form of government spending to ensure that the economy has an infrastructure,
without government spending there would be no public safety no transport infrastructure such as roads. But
when looking at opportunity cost of the capital being invested it becomes apparat that high government
spending, along with increased budget deficits, have a negative impact on the economy as the capital would
be better spent left within the private sector at little if any charged interest.
Government spending has a direct impact on the aggregate demand of the economy, the total spent on
services and products. (Parkin, 2014)
“Aggregate demand (AD) is defined as the total amount of goods and services consumers are willing to
purchase in a given economy and during a certain period. Sometimes aggregate demand changes in a way
that alters its relationship with aggregate supply (AS); this is called a “shift.” Since modern economists
calculate aggregate demand using a specific formula, shifts result from changes in the value of the formula’s
input variables.” (Ross, 2018)
Examples of Government spending within an economy are, education, welfare, health, housing, protection,
water and agriculture, transport and communication, debt and other. Please view Appendices for South
African Government Spending budget review for 2017-2018.
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PBA4801 Assignment 2 – Economics for Managers
Figure 1 Aggregate Demand by Mactutor
(Macroeconomics Tutor, no date)
An increase in Government Spending will shift the Aggregate demand curve to the right, thus increasing the
demand for products and services. This is because the government will be putting more capital in the
economy increasing buying power. And a decrease in government spending will shift the aggregate demand
curve to the left thus reducing the demand for goods and services. Government spending can be used to
assist the economy as mentioned in the Keynesian Model, whereas in the Classical model it was believed
that the economy would stabilise itself. The Keynesian model was developed after the great depression,
after the classic model failed and the economy did not assist itself.
Figure 2 Government Spending and AD
(McIntyre and Ataguba, 2018)
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Government spending can be resourceful during a recession to assist the economy to get back on tract, but
too high government spending could lead to an increased budget deficit, which is when the costs exceed the
profits. And the budget deficit is an indication of an economies financial health and needs to be paid back at
an interest rate. According to Fin24 In February 2018 South Africa’s budget deficit was R195 Billion. (Brown,
2018)
A high budget deficit may lead to increased inflation, future tax cuts, higher debt interest, higher bonds. All
of this will have an impact on the organisations within the economy and their disposable cash.
In my example ABC Chemicals imports chemicals from China, they rely on a good exchange rate to obtain
the best prices for their stock. Now let’s say the government has increased its spending significantly, ABC
chemicals will experience a increase in sales for a while, especially if they are supplying chemicals to the
public sector that the government finances, but if the additional capital is coming from funds the government
has loaned and the budget deficit becomes a problem, the whole country could be downgraded to junk
status, as we saw happen in South Africa. Junk states will mean that ABC chemicals will pay significantly more
