ECONOMICS
Economics Final Descriptive

Economics Final Descriptive - 1 MG 640 Managerial Economics...

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1 MG 640 Managerial Economics April 9, 2016 Final Exam Name: (Last): Modi (First): Chirag PART I: Problem/Discussion 1. a) If the economy is in a recession, what sort of fiscal policy changes would tend to bring it out of recession? Discuss Ans. If the economy is in a recession, an expansionary fiscal policy would aid in helping the economy to come out of recession. Expansionary fiscal policy involves increased government spending which will raise the income and aggregate demand at the national level. In other words, increase in money supply causes overall income levels in the economy to increase as more jobs are created. This results into increased spending as consumers now have more disposable income to consume and invest thus helping the economy to grow. b ) What is the difference between inflation and a relative price increase? Explain Ans. Inflation means a sustained, rapid increase in prices , as measured by some broad index (such as Consumer Price Index ) over months or years, and mirrored in the correspondingly decreasing purchasing power of the currency . Relative price means rice of a commodity as it compares to another. The relative price is usually presented as a ratio between the two prices . Dr. D Rawana Page 1
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2 Inflation refers to the general increase in the price level of all the goods in the economy, without any relation to relative price changes. Relative price changes refer to the change in price of one good relative to another. It is expressed in ratio form of price levels of two goods and is used majorly for comparing price changes between two goods. I nflation is a constant increase in the general price level of goods and services. Relative price is the value of a good in terms of another good. It is the ratio of two prices. c). If the inflation rate is 2% and the nominal rate of interest is 8%, what is the real rate of interest? Explain with an example . Ans. Real rate of interest = nominal rate - inflation rate = 8 – 2 = 6% For example, if a loan has a 9 percent interest rate and the current price level is 6 percent, then the real return on that loan is 3 percent. 2 . What is meant by budget deficit? What are the different ways it can be financed? Is the national debt a problem? Discuss Ans. Dr. D Rawana Page 2
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3 Basically it is called as the excess of expenditures on revenues The term Budget Deficit is used as National Spending Rather than individual or Business Spending’s Three Types of Deficits Revenue Defects=Total Revenue Expenditure - Total Revenue Receipts Fiscal Deficits= Total Expenditure - Total Receipts (Excluding Borrowings) Primary Deficits=Fiscal Deficits - Interest Payments Financing Deficit Budget 1 The government can borrow funds from the other sectors of the economy 2 Borrow funds from international financial markets.
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