Question

How does investment in capital goods and infrastructure contribute to economic growth?

How could the omission of net exports from GDP overstate production? Or understate it?

How will a sustained appreciation of the U.S. dollar over time likely affect U.S. net exports?

Assume that the United States raises tariffs on products imported from other countries. What effect will this U.S. trade policy have in the short run if other nations do not change their policy? What effect will this policy have in the long run if other nations retaliate?

What two solutions did Keynes suggest as appropriate government policies in order to close a recessionary gap? Does the assumption of stuck prices hold true when the economy moves close to its potential output? Explain.

How do high rates of inflation affect the acceptability of a nation’s currency?

Answer 1

HOW DOES INVESTMENT IN CAPITAL GOODS AND INFRASTRUCTURE CONTRIBUTE TO ECONOMIC GROWTH?

when a government invest funds in the capital goods and development of infrastructure in an economy then the unemployed person can be employed and get the job and in consideration they get wages and spend their earning on the consumption of goods and services and in this way the Aggregate demand increases and a healthy economy develops. one can always observe that a developed economy has always better infrastructure rather than the under developed nations.

HOW COULD THE OMISSION OF NET EXPORTS FROM GDP OVERSTATE PRODUCTION? OR UNDERSTATE IT?

GDP implies the production of finished and consumable goods and services in an economy during a financial year.the exporting elements such as goods and services are also a part of the national GDP. if these are not included / omitted during the calculation then it may lead to misleading and incorrect result. if a greater value of export has been added in the net export rather than the original one then it may lead to overstate production and a less value is added then it may provide understate the result.

HOW WILL A SUSTAINED APPRECIATION OF THE U.S. DOLLAR OVER TIME LIKELY AFFECT U.S. NET EXPORTS?

Appreciation in the US dollar will leads to make the import cheaper for the country but it will also put an inverse impact on the other country of the world to execute import order from US because of the dearer US currency therefore as a result the net export of the US would decline.

ASSUME THAT THE UNITED STATES RAISES TARIFFS ON PRODUCTS IMPORTED FROM OTHER COUNTRIES. WHAT EFFECT WILL THIS U.S. TRADE POLICY HAVE IN THE SHORT RUN IF OTHER NATIONS DO NOT CHANGE THEIR POLICY? WHAT EFFECT WILL THIS POLICY HAVE IN THE LONG RUN IF OTHER NATIONS RETALIATE?

when US would increase the import tariff and assuming that in short run the other country don't react then it may lead US to a win - win situation , where the import would decline due to the dearer imported goods due to tariff then the people will tend to buy the domestic produced good and also it would leads to improve the level of BOP of the country.

on the other hand if in long run the rest of the world or the foreign countries retaliate then there would be a tariff war among various countries and overall global inflation would take place.various decisions would have to be taken to restore the economy at equilibrium level.

WHAT TWO SOLUTIONS DID KEYNES SUGGEST AS APPROPRIATE GOVERNMENT POLICIES IN ORDER TO CLOSE A RECESSIONARY GAP? DOES THE ASSUMPTION OF STUCK PRICES HOLD TRUE WHEN THE ECONOMY MOVES CLOSE TO ITS POTENTIAL OUTPUT? EXPLAIN.

1. to make huge public investment in the economy.

2.to reduce the taxes in the economy and increase the fiscal spending in the economy.

stuck price also known as price rigidity is depends on various terms.when economy operates then the prices don't change immediately but it take some time. therefore this assumption may be true but for a definite period of time.

HOW DO HIGH RATES OF INFLATION AFFECT THE ACCEPTABILITY OF A NATION’S CURRENCY?

High rates of inflation reduce the purchasing power of currency fo a country. citizens and business firms  may not like to hold currency that loses its value quickly because of high inflation. They may look for alternative currencies or securities to hold that do not lose value. These actions reduce the economic efficiency of money. It is also difficult for consumers to evaluate and estimate the optimum prices as a representative of the value of a product as the prices are fluctuating frequently.