,ECS2606 Assignment 1 (COMPLETE ANSWERS) Semester 2
2024 (583390) - DUE 15 August 2024 ; 100% TRUSTED
Complete, trusted solutions and explanations.
1. Discuss and diagrammatically illustrate the fundamental
balance principle. [10] Read the excerpt below and answer the
question that follows: Africa has made significant strides in the
growth of its solar energy industry in recent years, with the
continent seeing an increase of over 1.8W in new solar
installations, primarily led by Egypt, South Africa, Kenya,
Namibia, and Ghana. In order to simultaneously speed up
energy access and support sustainable economic growth,
Africa’s renewable energy mix has increasingly switched away
from conventional hydropower and thermal facilities to
renewable alternatives.
Fundamental Balance Principle
The Fundamental Balance Principle is a concept in economics
that asserts the need for balance in various economic aspects to
ensure overall economic stability and sustainability.
Specifically, it often refers to the balance between different
components of the economy, such as the balance between
imports and exports (trade balance) or between savings and
investment.
In a broader sense, the principle emphasizes that imbalances in
one part of the economy can lead to adjustments or
repercussions in other parts. For example, a trade deficit might
lead to changes in exchange rates or adjustments in monetary
policy.
, Diagrammatic Illustration of the Fundamental Balance
Principle
Diagram Explanation:
1. Axes:
o Vertical axis: Price Level (P)
o Horizontal axis: Real Output (Y)
2. Curves:
o Aggregate Demand (AD): Represents the total
demand for goods and services in the economy.
o Aggregate Supply (AS): Represents the total supply
of goods and services in the economy.
Initial Equilibrium:
• The initial equilibrium is where AD intersects AS at point
E1, with output Y1 and price level P1.
Imbalance and Adjustment:
1. Positive Shock to Aggregate Demand: If there is a
positive shock to aggregate demand (e.g., increased
government spending or investment), the AD curve shifts
to the right (AD1 to AD2).
2. Adjustment Mechanism:
o Short-Run: The economy moves to a new equilibrium
(E2) with higher output (Y2) and a higher price level
(P2).
o Long-Run Adjustment: Over time, if the economy is
operating above its potential, inflationary pressures
may rise, causing the AS curve to shift leftward (from
AS1 to AS2) as costs increase. The economy returns
