please explain with full detail (2)The consumer price index (CPI) and aggregate
ID: 1129586 • Letter: P
Question
please explain with full detail
(2)The consumer price index (CPI) and aggregate real output (Y) are presented as follows: Year CPI 1978 65.2 575.2 1979 72.6 590.7 1980 82.4 578.6 1981 90.9 570.2 1982 96.5 581.1 (1)Find the rate of inflation for each year beginning 1979. (2)Find the short term g (3)What is a business cycle? Identify its phases and comment on the economic problems associated with each phase. Discuss the appropriate fiscal and monetary policy tools required to deal with each problem. [Fiscal Policy (taxes & government spending)1 (Monetary Policy (money supply & interest rate)] rowth rates and the compounded growth rate for the entire period. Section RExplanation / Answer
1.
The inflation from begining of 1979 is given in the table below
YEAR
CPI
Inflation
1978
65.2
1979
72.6
11.34969
1980
82.4
13.49862
1981
90.9
10.31553
1982
96.5
6.160616
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2.
If the initial value of a variable x is x0 and after a time period t the value is xt, then the growth rate (gt) of a variable x is given as
g_t=( rac{x_t}{x_0}-1) imes 100
The compound growth rate is given as
cg_t=[( rac{x_t}{x_0})^{ rac{1}{t-1}}-1] imes 100
The compound growth rate between 1978 and 1982 is given as
cg_t=[( rac{581.1}{575.2})^{ rac{1}{5-1}}-1] imes 100=0.255%
The growth rate in each period is given in the table below
YEAR
Yt
gt
1978
575.2
1979
590.7
2.694715
1980
578.6
-2.04842
1981
570.2
-1.45178
1982
581.1
1.91161
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3)
The business cycle is the cyclic alteration of increase and decrease in the economic activity. There are four phases of business cycle: the peak, recession, the trough and recovery.
The four phases of business cycle are as follows:
The peak: The peak is the phase of a business cycle where the economy operates at its full capacity. After peak the economy starts its downturn.
Recession: The recession occurs when growth rate of economic indicators such as GDP, investment, unemployment, profits falls for two consecutive quarters.
The trough: The trough is the bottom of the economic downturn. After trough the general economic activity began to rise.
The recovery. The recovery is the phase when the economy starts picking up from a downturn. After trough general economic activity increases until the economy reaches in another pick.
To combat or off set the recessionary gap the economy needs to produce more than what it is producing in the short run. Thus it needs to increase its aggregate expenditure and real GDP. Thus the government took an expansionary fiscal policy of either cutting taxes or increasing government spending. The increased government spending increases the aggregate expenditure and thus shifts the aggregate demand curve upward until the economy reaches long run equilibrium.
To combat or off set the inflationary gap the economy needs to produce less than what it is producing in the short run. Thus it needs to decrease its aggregate expenditure and real GDP. Hence the government took a contractionary fiscal policy of either increasing taxes or decreasing government spending. The decreased government spending decreases the aggregate expenditure and thus shifts the aggregate demand curve downward until the economy reaches the long run equilibrium.
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