Please provide a guided answer or a brief explanation, your help is very appreci

Question

Please provide a guided answer or a brief explanation, your help is very appreciated.

In 2016 real GDP was equal to 10565 billion euros, but in 2015 real GDP was 8000 billion euros. Calculate growth rate of national economy and explain the result. If in 2016 the level of potential GDP was equal to 9500 billion euros, then: a) What problem occurs in this economy'? b) What stage of business cycle does this situation represent? Characterise this stage of business cycle. c) What should do the government and Central bank in order to overcome the problem and to stabilise national economy?

Explanation / Answer

Growth rate is equal to 10565-8000/8000 multiplied by 100=32. 06%

A Since now potential GDP is less than actual gdp(9500 versus 10565) the economy is growing more than its potential level. This will lead to inflation, inequality, subsequent recession etc if not handled well

B it represents boom or peak in business cycle. In this stage employment, output, incomes, prices ALL ARE at high level. Higher profits led to huge investmentS which in turn raise demand for consumption goods and thus further rise in prices.. Economy is led to over full employment and inflationary rise in prices. The seeds of recession are contained in boom because scarcity of labour, rawmaterials etc lead to rise in costs relative to prices and also consumption fails to rise due to rise in prices and stable propensity to consume

C The govt should increase taxes and decrease expenditure. IT SHOULD PURSUE tight fiscal policy. The central bank should pursue tight monetary policy

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