Fiscal Policy & Monetary policy
How can fiscal policy stimulate the economy during a recession?
By increasing government spending or reducing taxes, encouraging economic activity.
What is absolute advantage in trade?
When a country can produce more of a good than another country using the same resources.
What does the law of demand state?
When the price of a good rises, the quantity demanded decreases, all else being equal.
What does GDP measure?
The total value of final goods and services produced within a country in a given period.
What is a bond?
A bond is a loan made by an investor to a borrower (like a government or corporation) in exchange for periodic interest payments and the return of the principal at maturity.
What is the role of interest rates in monetary policy?
Interest rates represent the cost of borrowing, influencing spending and investment in the economy.
What is comparative advantage, and why is it important for international trade?
Comparative advantage allows countries to specialize in producing goods with the lowest opportunity cost, improving overall efficiency.
What happens when the price of a good is higher than the equilibrium price?
There is a surplus, as the quantity supplied exceeds the quantity demanded.
What is the difference between real and nominal GDP?
Real GDP is adjusted for inflation to reflect the true value of goods and services, while nominal GDP is not adjusted for inflation.
How do bank loans differ from bonds as debt instruments?
Bank loans often have shorter terms and higher interest rates, while bonds can provide long-term financing at lower rates.
How does monetary policy differ from fiscal policy in managing the economy?
Monetary policy adjusts the money supply, usually through interest rates, while fiscal policy changes government spending and taxation.
How does a country benefit from specializing in goods it has a comparative advantage in?
By producing goods more efficiently and trading for goods where they are less efficient, leading to mutual benefits.
The demand and supply functions for a product are given as follows:
Calculate the Eq. price and quantity.
P=13.33
Q= 73.34 units.
What does GDP per capita indicate?
It measures the average economic output per person, providing a relative measure of well-being between countries.
Why are government bonds typically considered low-risk investments?
Governments have the ability to raise taxes or print money to meet their obligations, making their bonds more secure.
If the economy is experiencing high inflation, should the central bank increase or decrease interest rates? Explain the rationale behind the decision.
Increase interest rates to reduce the money supply and control inflation.
A country has an absolute advantage in producing both cars and textiles, yet it only exports textiles. What factors might explain why it focuses on exporting textiles instead of cars?
The country has a comparative advantage in textiles, with a lower opportunity cost, or it responds to external demand and specialization factors.
Suppose a government imposes a price ceiling below the equilibrium price for a basic good. What effects will this have on the market, and how might it lead to unintended consequences?
It creates a shortage, where the quantity demanded exceeds the quantity supplied, leading to queues, black markets, or rationing
Using the following data, calculate the GDP of a country using the expenditure approach:
Consumption (C): $500 billion
Investment (I): $200 billion
Government spending (G): $150 billion
Exports (X): $100 billion
Imports (M): $80 billion
The GDP of the country is $870 billion
If a government bond's interest rate is lower than inflation, why might investors still choose to buy it? What are the potential risks and benefits of this decision?
Investors may seek the perceived security of government bonds, even if real returns are negative, with risks including loss of purchasing power.
During a deep recession, the government decides to implement both a fiscal expansion and the central bank adopts an expansionary monetary policy. How might these policies interact, and what potential risks should policymakers consider?
There is a risk of unsustainable debt or excessive inflation if both policies are too aggressive.
Two countries can both produce electronics and food. One country has a comparative advantage in electronics and the other in food. How would the concept of opportunity cost guide their trade strategy, and what could be the consequences of not following this principle?
The opportunity cost principle suggests specializing in goods with the lower opportunity cost, and not following it can lead to reduced trade benefits and inefficiencies.
If a natural disaster destroys half of a country’s wheat crop, how would this shift in supply affect the equilibrium price and quantity? What long-term adjustments might consumers and producers make in response to this change?
The equilibrium price would increase due to the reduction in supply, and adjustments may include reduced wheat consumption or investment in agricultural technology to compensate for losses.
A country’s real GDP has been increasing, but the population feels their standard of living has not improved. What factors could explain this discrepancy?
Income inequality, deteriorating public services, or a rising cost of living may counteract the benefits of economic growth.
What are the key differences between corporate bonds and bank loans
Refinancing Flexibility, Interest Rate Terms, Impact on Long-term Financial Strategy