Week 8 Economy

B51876
Economics

Week 8 Economy
Q1 List the three potential ways of measuring the level of output in an economy.
Measurement of level of output or the total sum of production that a firms makes, has two
ways of measurement.
 Considering total value of goods and services that are produced by the firm, and adding
the values of final goods and services that the firm produces.
 By adding the value in terms of prices that are added at each stage of production.
Through these two ways, the outputs and its value can be measured in an economy.
Q2 How is national income at basic prices calculated from gross national product at market?
National income at base price is the income that is generated by the residents of that
country, in calculation to the base year pries. This income is also sometimes referred to as the
real national income. It shows the real picture of economic growth of a country. For calculating
National income at base prices from Gross national product at market prices, formula that can be
used is:
National income at P0= Consumption expenditure+ Government Expenditure+
Investments+ Exports+ Foreign income- Depreciation
Q3 What is a fiscal drag?
Fiscal drag sis that situation in economy where, inflation or accrual of higher income
growth to people, moves people into larger taxable bases. In this Taxation also increases with
increase in income.
Q4 What are the costs of deflation?
Under the costs of Deflation, aggregate demand in economy is seen falling, leading to
lower reasons with producer to produce more goods in economy. Low production means lower
reasons to invest and this means decreasing incomes to people. Deflation increases value of reall
debt ultimately.
Q5 How does fiscal policy differ from monetary policy?
Both Fiscal and Monetary policies are tools of government that government uses for
bringing stability in economy of a nation. However, there is some basic difference between the
two policies, in fiscal policies the cost is met through fiscal reserves of government, but in

monetary policies changes in different types of economic rates are fluctuated to fluctuate
economic sentiments of people.
Q6 Explain the tradeoff between inflation and GDP
The tradeoff between inflation and GDP, is the relation between these two in larger
contexts. The inflation in general terms is indicative of higher economic growth and good
production sentiments as the aggregate demand is seen higher. When production are grown, then
factor cost will be more divisible in factors of production meaning more income to the people.
Q7 What is meant by inflation? How is it measured?
Inflation in simple terms, is the rise in prices of goods and services in the economy,
which are in usual deviations from regular price stability. This measure the average price change
in basket commodities and services over time. The most common methods to measure inflation
in economy is through two indices, that are Consumer Price Index and Wholesale Price Index.
Q8 What are the different types of unemployment?
In basic economics, there are three types of unemployment;
 Demand deficient unemployment
 Structural unemployment
 Voluntary unemployment
Q9 How do governments manage the economy by controlling aggregate demand... tools used
by the central bank of a country?
For controlling aggregate demand in the economy, the government is more frequently is
seen using monetary policy measures. Aggregate demand in the economy is seen increasing
because of increase in flow of money and liquidity in the economy, therefore, through fluctuation
in interests rates in a manner which soaks liquidity from hands of people, government controls
aggregate demand in the economy.
Q10 How does inflation targeting affect firms and consumers in an economy?
Inflation targeting is that mechanism of government from which government decides to
control the rise and fall in the inflation and keep it in a specific range which is favorable for all
the consumers in the market. Inflation in market becomes high and low because of the flow of
market forces in the economy. And, if the government intervenes in flow of market forces then
natural predictability by firms is eroded and external influences are increased.