Assignment 1: Economic Impacts Template

Assignment 1 Economic Impacts Templatebudgetseco1102budget 1dollarsper

Help your friends create a way to explain the economic and budget situation to their family. Additionally, think about what economic trends and changes mean to your own personal life and finances. Questions:

1. In the first four weeks of this class, you have learned about economic concepts such as supply and demand, scarcity, tradeoff decisions, international trade, opportunity cost, and compound growth. Choose one economic concept from this list and explain how it is relevant to your friends' budget situation.
2. How did expenditures change between budgets? Which expenditures changed the most? Which expenditures changed the least? Which stayed the same?
3. What were the economic trends that created the need for your friends' family to change their expenditures? What can you infer about the connection between prices and expenditures, based on the economic concepts you have learned?
4. Help your friends explain the rationale for their budget decisions to their family. Some questions you could help them answer are: a. Why did your friends decide to buy less imported food and more domestic food? b. Why did your friends decide to use the furnace and air conditioning less? c. Why did your friends decide to walk more? d. Why couldn't your friends change the amount spent on education and family care? e. Why did your friends decide to reduce savings, and what will the long-term effects of that be?
5. In our personal lives, we sometimes need to react to changes in our economic environment. Thinking about your own budget, describe how a change in an economic variable (such as a change in income, employment, interest rates, or prices) from within the last year either has impacted or could impact your personal life and finances. If the trend continues over the next year or two, what predictions could you make about further impacts to your personal life and finances?

Paper For Above instruction

The economic concept most relevant to my friends' budget situation is "supply and demand," which fundamentally explains shifts in prices and how consumers react to them. Supply and demand are central to understanding the changes in their household expenditures as prices for imported foods and utilities fluctuate. When the price of imported food increases, it reduces the quantity demanded because consumers tend to buy less of a product when its cost rises, a basic principle of demand. Conversely, when the price of food from the United States drops, it becomes relatively cheaper, and consumers are more likely to purchase more of these domestic options, which is in accordance with the law of demand.

Analyzing their expenditures, the most notable change was in imported food, which decreased from 1% to none of their budget. The expenditures least affected were education and family care, both remaining constant at 2%. Rent increased from 7% to 8%, and food from the U.S. increased from 2% to 3%. Savings decreased from 7% to the same percentage relative to income but with a different absolute amount, suggesting a reallocation of resources to essential and unavoidable expenses amidst rising costs. These changes indicate their family has adapted to higher prices of imported goods and utilities by reducing consumption of those items, exemplifying the economic principle of substitution, which is also influenced by relative prices.

The economic trends responsible for these adjustments primarily involve inflation—an overall increase in prices, particularly for imported goods and utilities. Rising rent reflects higher housing costs possibly due to increased demand or inflationary pressures. The decrease in the price of U.S. food signifies improved trade terms or better domestic production, making these options more attractive. These trends imply a direct relationship: as prices for imported goods rose, expenditure on them declined, demonstrating the law of demand. Conversely, the decrease in the cost of U.S. food led to increased purchasing, reinforcing how price changes influence consumer behavior and expenditure distribution.

Explaining their decisions, my friends chose to buy less imported food and opt more for domestic options because imported foods became more expensive due to increased tariffs or shipping costs, prompting a substitution for cheaper, locally produced foods. They reduced usage of the furnace and air conditioning to cut utility bills amidst rising energy prices, a necessary conservation effort to stay within budget. Walking more instead of relying on taxis or ride-sharing was a behavioral response aimed at saving money and adapting to higher transportation costs. The fixed expenditures on education and family care reflect the non-negotiable nature of these essentials, which cannot be easily adjusted in the short term. Lastly, reducing savings was a necessary tradeoff to cover increased costs, which might impact their long-term financial security, especially if such expenses persist or escalate, leading to less capital accumulation for future needs.

In my personal experience, a significant change in interest rates over the past year has impacted my savings account returns. When interest rates increased, I earned more on my savings, encouraging me to save more and reconsider my investment strategies. Conversely, if interest rates decrease, the lower returns may discourage savings and lead to increased consumption or debt repayment. If such a trend continues, I predict my capacity to save will diminish, potentially affecting my ability to build an emergency fund or fund future investments. Additionally, inflationary pressures could increase living costs, prompting me to adjust my budget further, perhaps by reducing discretionary expenses or seeking higher income opportunities. These changes underscore the interconnectedness of economic variables and personal financial decision-making.

References

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