Economics for Decision Making

This document provides calculations and explanations related to consumption, investment, government expenditure, and GDP in Classica in 2019. It also discusses the measurement of standard of living, the calculation of the simple money multiplier, the impact of tax cuts on long-term development, the relationship between weaker currency and exports, and the effects of printing more money. Additionally, it explains the impact of low inflation on aggregate demand and the use of nominal GDP as a strategic tool in managing the money-related approach.

Economics for Decision
Making

Question 1
(a)
i)
The value of consumption in Classica in 2019:
The given consumption of new goods and services is worth around $1 million dollar. Out of this
20% consumption made by foreigners will be reduced on the principle of only considering the
consumption of Classica. Therefore 80% will be kept out from $1 billion to get Classica’s total
consumption worth.
Calculation:
80% of $1 billion = .80 * $1000, 000,000
= $800, 000,000 or $0.8 Billion
ii)
Value of investment in Classica in 2019:
Investment function indicates spending by manufacturers to acquire fixed assets or any other
property to raise money. The calculation has been done below:
Calculation:
Total investment = Housing stock (70%) + wages + bonds + expansion expenses
= $70, 000,000 + $120, 000,000 + $150, 000,000 + $25, 000,000
= $365, 000,000 or $365 Million
Note: While calculating housing stock; only 70% has been considered due to the fact that 30% is
already calculated in previous year so to avoid duplicity, 30% of existing housing stock has been
reduced.
iii)
Value of government expenditure in Classica in 2019:

Calculation:
Government expenditure = Procurement of protective equipment + Paid fees to agents +
Transferred to charities
= $150 M + $10 M + $20 M
= $180 M
All the expenditure by government has been considered; as all the spending has been done for
the growth of the economy.
iv)
Classica’s GDP in 2019:
GDP = C + G + I + (X-M)
C = Consumption
G = Government expenditure
I = Investment
X - M = Export – Import or Net export
GDP = $800 M + $180 M + $365 M
= $1, 345 Million or $1.354 Billion
(b)
The standard of living is a measure of the material aspects of a national or regional economy. It
counts the amount of goods and services produced and available for purchase by a person,
family, group, or nation.
In this case; both Nigeria and New Zealand has same currency but different Purchasing power
parity; so comparison based on current prices for all goods and services in the form of Nominal
GDP will not accurate result for measuring standard of living in New Zealand as well as in
Nigeria. So, I totally disagree with this statement.
For instance; the price of product X in New Zealand is $2 while in Nigeria it is $4 dollar; and
both countries consumes 100 units of same product. Thus the nominal GDP of New Zealand will
be $200 and Nigeria’s $400 but their consumption of units are same; therefore nominal GDP is
not feasible method to measure standard of living.

To measure standard of living; Real GDP and GDP per capita income is best method.
Question 2
(a)
i) Calculation of simple money multiplier
Simple money multiplier = 1
Reserve ratio
= 1
3.5 % = 28.57 times
Hence, at 3.5% Reserve ratio; money multiplier is expected to be 28.57 times.
ii) Expected money multiplier
Expected amount of money supply in banking system = Customer deposit × Money multiplier
= $2,500 × 28.57
= $71,425
(b)
$1 billion was paid gracefully in cash (MS) and $ 0.5 billion was paid into MS, a net reduction of
$ 0.5 billion. The decrease in reserves reduces the amount of borrowed funds and therefore the
pressure on liquidity. The amount of money introduced through the clearing system between
banks and ESA accounts is held by the RBA.
The monetary approach has the greatest impact on generating results in the economy. However,
financial activities can have a significant impact. There are a number of components to the
Reserve Bank's monetary strategy activity since March. They are known to support the recovery
by lowering access rates for family and business units, just like the legislator, and they kindly
support credit. Hence, based on current situation it is expected that money market rate, cash rate
and bank bill swap rates going to be historic low and large amount of government securities will

be utilized in balancing trade off and development of cities to increase the growth opportunity
(Barberis, 2013).
Question 3
a)
(i)
Yes, the weaker currency will increase exports because after weakening the currency; the price
of product will reduce and this will give competitive advantage in increasing the demand for the
products and services in international market. More demand keens to more supply and
simultaneously more production to fulfill the demand. This entire event will help in boom the
inflation cycle and also break down the depression period as soon as possible. This will impact in
future through bring back inflation period in the economy and avoiding depression duration.
(ii)
The financing of tax cuts has a significant impact on its long-term development. Tax
breaks funded by rapid cuts in inefficient government spending could increase yields, while a tax
cut funded by a downturn in government business could reduce returns. If they are not funded by
spending cuts, the tax cuts will lead to an expansion in government ownership, thus reducing
long-term development. Recorded evidence and breeding studies suggest that duty-funded tax
breaks over a multidimensional period will have little positive impact on long-term development
and minimize development.
The change of duty is more complex, as it involves cuts in cost levels just as the expansion of the
base changes (Bös, 2014). It is accepted that such changes are expected to increase the overall
size of the economy in the long run, but the impact and magnitude of the impact depend on
widespread vulnerability. It is a reality that often escapes unconsciousness that widening the
spending base by reducing or eliminating responsibilities increases the level of positive appraisal
facing individuals and businesses and consequently working on, in such an impact on financial
development. In any case, further expansion of the base is an added benefit of redistributing
assets from parts of current value to areas with the most prevalent finance (pre-expenditure form,
which should build the overall size of the economy.

A fair assessment would conclude that well-designed tax policies have the potential to raise
economic growth, but there are many hurdles along the way and there is no guarantee that cost
changes will improve performance money. With the various channels through which a cost
strategy influences development, a more evolved role change will begin to the extent that it
incorporates (I) significant incentive effects (delocalization) than empowering work, persuasion
and entrepreneurship; (ii) minimum wage or adverse effects, including a cautious focus of tax
breaks towards new cash flow, rather than adding a blessing to previous years; (iii) reduction of
circuits between financial sectors and between different types of remuneration and use; and (iv) a
gradual increase in the spending deficit (Eichhorn, 2013).
b)
I agree with this statement because:
1. Increased spending: Workers will see an increase in their discretionary income. With lower
income tax rates, they would keep more of their gross income, so effectively they have more
money to spend.
2. Higher economic growth: With lower tax rates, we could expect to see a rise in consumer
spending because workers are better off. Because consumers spending is a component of
aggregate demand (AD) (roughly 60%), then a rise in consumer spending should cause a rise
in AD, leading to higher economic growth.
Question 4
a)
If the inflation is below the target range of central bank than it indicates slow inflation rate and
this will result into low aggregate demand and simultaneously production will be reduced. The
manufacturing firm will not produce products at its full capacity and this will create gap between
actual output and full capacity (Fuss and McFadden, 2014).
Price
ASAD1
AD2

Quantity
The above diagram shows that; with low inflation rate demand has been declined with decrease
in product price. AS represents Aggregate supply and AD represents Aggregate demand. It is
clearly shown that when demand shifts from AD1 to AD2; the price and quantity supply has also
declined downwards. This will result in low output production.
b)
I agree with the statement that printing more money will lead to inflation but only for short
period of time and this will lead to weaken the currency value in the market. It will dangerous for
Australian economy to survive longer with low currency value; as money with low value is just
piece of paper and can crash whole economy. This is because; money has a value equivalent to
its gold reserves and printing money more than this reserve is value less and dangerous for
economy ( case of Zimbabwe where money was thrown on the road due to no value in the
market).
c)
Nominal GDP is sometimes replaced by a price index as a more powerful strategic tool for
managing the money-related approach because GDP changes are evident as the total number of.
Obvious and real changes in the overall financial movement allow to deal legitimately with yield
fluctuations. In addition, GDP appears to be completely invisible in the buyer value list and the
apparent GDP level is an important indicator for examining the potential of obligations (Kalecki,
2013).
Moreover, the GDP which it appears to focus on has been argued by unparalleled financial
experts as a robust adjustment tool in building a bloat, perhaps equivalent to method estimates
other money-related work, for example, quantitative enabling (QE) or forward management of
loan costs) (Lavoie, 2014). In terms of QE, it could not be very powerful if the additional
employment of the financial base was stable, so the costs and salary would probably need to be
higher and higher and expand traders the consumption is similar today. In terms of forward

guidance, it may not suffice as a strategic tool: when the RBA, for example, proves that it has
been determined to keep strategy levels low for a complex period of time, it has the basis that the
Does the RBA actually introduce the upgrade method or on the basis that it expects weaker
development at a later date? An obvious focus of GDP on that GDP profit would be according to
a pre-crisis model as a selective approach, not above and perhaps easier to give to the general
population (Ruegg and Marshall, 2013).
REFERENCES
Books and Journals
Barberis, N. C., 2013. Thirty years of prospect theory in economics: A review and
assessment. Journal of Economic Perspectives. 27(1). pp.173-96.
Bös, D., 2014. Public enterprise economics: theory and application. E
Eichhorn, W. ed., 2013. Measurement in Economics: Theory and Applications of Economics
Indices. Springer Science & Business Media.
Fuss, M. and McFadden, D. eds., 2014. Production economics: A dual approach to theory and
applications: Applications of the theory of production. Elsevier.
Kalecki, M., 2013. Theory of economic dynamics (Vol. 6). Routledge.
Lavoie, M., 2014. Post-Keynesian economics: new foundations. Edward Elgar Publishing.
Ruegg, R. and Marshall, H., 2013. Building economics: theory and practice. Springer Science &
Business Media.