de you to expand your major points iuuly brganized response. Chapter 11 1. Many
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Question
de you to expand your major points iuuly brganized response. Chapter 11 1. Many financial analysts use GDP as a measure of the economy's performance. However, GOP has several shortcomings in terms of measuring economic well-being State at least three such shortcomings and explain how each affects the validity of GDP as a measure of economic well-being. (17 pt) 2. Distinguish between real and nominal GDP. Which one is a better measure of the business 3. What are the costs/negative consequences of inflation? Discuss each one of them with 4. What are the two policy options used to influence the economy? Discuss both with sutficient cycle? Explain. (17pt) sufficient detail (17 pt) detail (17 pt) Chapter 12 5. What are the determinants of investment spending? Each one of them in detai 15 6. In the summer of 2013, many news commentators started to raise concern over a poten tapering by the Federal Reserve If The Federal Reserve were to cut the money sup raise interest rates to control inflationary pressures how would thar the impact the aggre expenditure and income. Explain with sufhcient detail 17 ptExplanation / Answer
1. Gross domestic product or GDP is the sum total of money value of all goods and services produced in an economy in the current year. Now GDP indicates value of all produced goods and services in a country and this measurement indicates economy's performance. But this measurement has some shortcomings. Because it does not include some areas of economy or it does not show the actual situation. These areas are - I) GDP counts only those goods and services which has the market value or which has the official record. But in our economy lot of goods and services produced which do not have any official record. For example we can say that home services of hour parents or the family members who serve lot of works in their home. Many goods particularly agricultural goods are produced for home consumption. These are not included in GDP accounting. II) GDP does not count the black economy or the sector of goods and services which do not have any official record. It means GDP does not count many activities and value of many goods and services which has no record. It is kind of parallel economy or black economy and it goes through with formal economy. This economy never comes under the consideration of GDP. III) GDP counting do not consider any distribution of income. If the economy's income are very skewedly distributed then it does not have any impact on GDP counting. If some sections have many income where the others don't then it will not show it. IV) GDP does not count the impact of leisure time. It means let suppose two economy have same standard of living but one economy has more working time than others let suppose in one economy it is 10 hours where in others economy it is 7 hours. So this impact of 3 hours leisure time or benefit of this 3 hours leisure time are not considered by GDP. V) GDP does not account the pollution cost.
2) Nominal GDP of a country is measured in measured in current price and real GDP is measured in terms of constant price. Let suppose we measuring the GDP in 2017, when we measure the money value of goods and services based on the price of 2017 then it is GDP at current price. If we measure the money value of goods and services in terms of any fixed year or any given year let suppose in terms of price in 2012 then it will be a real GDP. Real GDP is always better than nominal GDP. Because real GDP GDP don't consider any price rise. It indicates the value of goods and services in terms of constant price. When we measure in terms of constant price then it indicates the true increase of value of goods and services. In nominal GDP by producing same level of goods and services we can get higher GDP because of higher price. So real GDP is a better measure of business cycle. It actually gives the increase or decrease of value of goods and services.
3) Inflation is the situation of continuous rise in price level. In case of inflation there is overall rise in price level. This inflation has some negative impact or negative consequences. First, due to inflation the real income of the people of the economy falls. When we have inflationary situation we will have less real income. This inflation reduce the real income. Second, inflation don't show the actual picture of the economy. This inflation gives a picture which is actually not the situation because it generally increases the value of goods and services. Third, it increases the cost of borrowing. When inflation occurs the cost of borrowing increases because the borrower will have less borrowing money in real terms when there will be inflation. Fourth, the real interest rate falls because we measure the real interest rate by (i-p) when P increases this i-p falls. So real interest rate falls due to inflation.
4) The policy are taken from either fiscal policy or moneytary policy. In terms of fiscal we can take change of government expenditure. When there will be change in government expenditure for example increase of government expenditure then this increase of government expenditure has an impact on the economy. Increase of government expenditure increase the income of people and employment sometimes, particularly during the time of recession. This government policy try to improve the condition of economy. Another policy we can take from Monetary policy let suppose central moneytary authority have decided to reduce the money supply to tackle the situation of inflation.This money supply are decreased through rise in policy ratios. When the policy ratio will increase then people will take less money in terms of lend. So less money supply reduce the demand of goods and services and that can reduce the price rise. First policy the government expenditure can change the aggregate demand and second policy money supply also has the impact on aggregate demand. So both these policy influence the economy.
5) The determinants of investment expenditure are rate of interest and level of income of the people. Rate of interest has negative relation with investment spending. If rate of interest rises then there reduce the investment spending. Increase in interest rate reduces the level of spending. Another factor of investment spending is the level of income. If the level of income is high then investment spending rises. There is a positive relation between investment spending and level of income. So investment spending can depend on rate of interest and level of income.
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