Free «Micro Economic Essay Questions» Essay Sample


We have always been advised to spend less than we in order to be fully prepared for the future.

Conventionally young workers are advised to start saving at the age of twenty five so that they can retire at sixty with an abundant package. That strategy I think is very tame. It is not a good idea to retire with a bond-heavy portfolio. When you are young you an asset that money can’t buy: time. Simply put you have room to make poor investment decisions learn from them and recover as you age.  You can afford to have more than hundred percent in equities when you are young. This will give you the right exposure and allow you to buy more on margin. You will have plenty of time to pay up your debt as age. Moreover, it will allow you to balance between stock and bond at the beginning of your retirement.

Mortgage Your Retirement

Marginal buying for retirement sounds very risky. However, it greatly reduces the probability that you may end up broke.

Investments should be made across time. This means that if you invest if you invest $1000 in one year, invest $1500 the following and consequently $2000 in the third year your investment will grow tenfold through the power of compounding.

When it comes to mortgages people, invest what they don’t have. When you buy a house, your exposure is determined by the value of your house rather than your equity position or the down payment.

Retirement plans must learn from home ownership. They should ensure that people take mortgages to invest in equities when they are young. The most important rule in real estate is the location whereas in investment is diversification. Investors who understand the benefits of diversification reap enormous benefits. If it is possible to invest what you do not have in houses through mortgages, why not do the same with equities?

Marginal propensity to consume

Marginal propensity to consume, abbreviated as MPC, was introduced by the Keynesian theory. MPC represents the ratio of an aggregate raise in salary that is spent on consumption rather than being saved. For example, if you get a bonus of $1000 in your pay as a reward for good performance throughout the year, you will have an extra $1000 in your paycheck. If you spent $700 of this $1000 on goods and services your marginal propensity to consume is 0.7.   A 90% marginal propensity to consume means that one consumes ninety percent of their pay rise at the expense of savings. In the last few months, many Americans have been getting extra dollars in their paycheck. This is attributed to the economic stimulus policy of the federal government. It is estimated that most Americans will take home a monthly pay increase of $50. Politicians and economists hope that these pay increases will encourage citizens to spend. Ideally, the authorities are betting on high expenditure to beat recession. This will undoubtedly increase the general population’s propensity to consume.

In 2008, the government took similar measures to increase public spending. However, government efforts did not bear fruit then. Many people used the increased payments to pay their debts and accumulate savings. Marginal propensity to consume measures how much more citizens are likely to spent if their salaries are increased. A marginal propensity to consume of 90% means that, for every dollar you are given, ninety cents will be spent as disposable income. Our national saving rate is at an all time low.  A high propensity to consume means that the savings will be low. Our MPC is hovering around the highs of 99%. This implies that Americans spent 99% of every penny they earn. The government is utilizing the high public expenditure to spur economic growth. Since the economy is not doing any better than it did twelve months ago, it remains to be seen how the payment stimulus method will impact on the economy.


In the study of micro economics, it is important for us to consider the multiplier so that we can fully appreciate the underlying concept. The multiplier measures the projected change in gross domestic product due to a change in significant variable like investment expenditures. A magnified change in production can be well explained as follows:

When income is high, more income will be generated. Increased income generation will lead to increased consumption. Due to high consumption manufacturers will produce more to meet demand and get their return on investment. Consumption in this case is expenditure in consumption. More income will be generated and consequently it will lead to more consumption. Finally, we shall have a multiplied magnified change in production. This change in production can be attributed to increased investments triggered by high consumption. MPC is hence, the process that determines how consumption is induced by an increase in income and change in consumption.

Federal Reserve Bank of New York

The federal reserve bank of New York is a member of the Federal Reserve System. It teams up with other private and public institutions to enhance safety, vitality and soundness of our financial and economic systems. The Federal Reserve Bank was created by congress in 1913 as an independent government entity to serve as the Central Bank of the United States. The Fed, as it is popular known, is responsible for enacting and formulating monetary policy, providing currency, regulating and supervising commercial institutions and helping the federal government in its financial operations.

The New York Fed plays additional roles like facilitating the country’s payment system, promoting development and development and protecting consumers from exploitation from commercial institutions.

The New York Fed covers the Second Federal Reserve District. This includes the US Virgin Islands, the New York state and the twelve counties. Despite serving a relatively small geographical area than other reserve banks, the New York Fed rated as the biggest Reserve Bank in terms volume of capacity and assets.

 Monetary Policy

Monetary Policy implies the actions put in place by Federal Reserve Banks in order to affect the availability of money and credit so as to promote economic growth. The Fed uses many methods to execute its monetary policy. These include: reserve requirements, open market operations, and discount window operations. Using open market operations, the bank buys and sells Treasuries securities so as to maintain the required level of bank reserves.

The New York Fed also intervenes in foreign exchange markets so as to achieve its policies in dollar rate exchange.

The Federal Reserve Bank of Philadelphia

The Philadelphia Reserve Bank acts as the Third Reserve District. It comprises of Delaware, Pennsylvania and southern New Jersey. The bank promotes integrity and transparency in the financial sector. The Philadelphia Fed conducts its research on many areas. Information obtained research is disseminated by publications. It covers topics as regional economy, forecasts, banking and financial markets.


The federal government should encourage citizens to cultivate a saving culture when they are young. This way they will retire comfortably to enjoy the fruits of their labor.


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