Q 2&3 only SECTIONA 14 marks The economy of Euphoria has the following economic
ID: 1138214 • Letter: Q
Question
Q 2&3 only SECTIONA 14 marks The economy of Euphoria has the following economic data. Year 2015 2017 545 505 1.00 5.00 5,000 2016 Nominal Gross Domestic Product (S billions) Real Gross Domestic Product ($ billions) % change in real consumption spending % change in real investment spending Net exports (S billions) Unemployment rate (%) Natural rate of unemployment Index of production costs (2015 100) Productivity index (2015 100) 470 470 3.00 2.00 23,000 5.3 4.8 100 100 485 480 1.25 10.00 52,000 5.8 4.8 105 101 5.4 107 103 Examine the data relating to the economy of Euphoria above and answer the following questions
Explanation / Answer
Q2. From the table we can see that there is a decrease in real consumption spending in 2017. The reason could be interest rate and inflation rate. When the central bank increases the interest rate in order to reduce the inflation, the cost of borrowing increases which reduces the disposable income, consumption spending and finally the GDP. When GDP reduces firms would lay off people which would result in increased unemployment. The type of unemployment would be cyclical because of variations in interest rate, inflation and GDP
Q3. Demand push inflation could be the reason for the increase in inflation when the demand for goods increases more than the productive capacity of Euphoria. So in order to reduce the inflation the central bank would have increased the interest rates and hence increasing the cost of borrowing.
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