Question

What is the difference between nominal and real GDP?

What is unemployment? Which types of unemployment do you know?

Which type of unemployment can be considered as acceptable? What should be its

level?

How is inflation calculated? What is the optimal level of inflation in the economy?

What is “bad inflation”?

Phillips curve.

Which instruments of monetary policy do you know?

Which instruments of fiscal policy do you know?

What is contractionary/expansionary monetary policy? In which stage of business

cycle should it be used?

What is contractionary/expansionary fiscal policy? In which stage of business cycle

should it be used?

Which stages of business cycle do you know? What are their characteristics?

What is quantitative easing? When should it be applied?

What is competitiveness of a country? How is it measured?

What is the effect of balanced budget to the economic growth?

What is IS-LM model?

What is interest rate/discount rate?

What is the connection between Y and I in IS relation?

What is the connection between Y and I in LM relation?

Which types of policy mix do you know? Which type(s) of policy mix can help

preserve the GDP at the same level?

Which types of policy mix are used during the peak/trough?

Answer 1

ANS (1) The main difference between nominal and real values is that real values are adjusted for inflation, while nominal values are not. As a result nominal GDP will often appear higher than real GDP.

ANS (2) Unemployment refers to a situation in which the workers who are capable of working and willing to work do not get employment.

There are basically four types of unemployment:-

(i) Frictional

(ii) Seasonal

(iii) Structural

(iv) Cyclical

ANS (3) Full employment is considered to be an acceptable level of unemployment above 0%. Full employment without any cyclical or deficient - demand unemployment, but does exist with some level of Frictional, Structural & Voluntary unemployment.

ANS (4) To calculate the current Inflation rate, it uses the most recently used CPI data and compares it to data from exactly 12 months by using a formula. The optimum inflation rate is 0.5% / year and the values range from 0.7%/ year without model uncertainty and 1.4%/year with extreme model uncertainty.

ANS (5) When inflation is too high it is not good for the economy or individuals. Inflation will always reduce the value of money unless interest rates are higher than inflation.

ANS (6) The various instruments of Monetary Policy used by RBI are Direct Regulation, Cash Reserve Ratio(CRR).

ANS (7) The various instruments of Fiscal Policy are Budget, Taxation, Public Expenditure, Public Works, and Public Debts.

ANS (8) Expansionary Market Policy is when a central bank uses its tools to stimulate the economy while Contradictory Monetary Policy is a form of economic policy used to fight inflation which involves decreasing money supply in order to increase the cost of borrowing.

ANS (9) Expansionary Fiscal Policy is defined as an increase in government expenditures and/or a decrease in taxes that causes the government's budget deficit to increase or budget surplus to decrease.

Contradictory Fiscal Policy is a form of fiscal policy that involves increasing the taxes, decreasing government's expenditures or both in order to fight inflationary pressures.

ANS (10) There are five stages of a business cycle:-

(i) Launch

(ii) Growth

(iii) Shake -out

(iv) Maturity, and

(v) Decline

CHARACTERISTICS OF BUSINESS CYCLE

(1) The business cycle occurs periodically.

(2) It is all-embracing.

(3) A business cycle is wave-like.

(4) The process of a business cycle is cumulative and self - reinforcing.

(5) Cycles are similar but not identical.

ANS (11) Quantitative easing is an unconventional monetary policy in which a central bank purchases government's securities from the market in order to lower interest rates and increase the money supply.

ANS (12) Competitiveness is the ability of an economy to compete fairly and successfully in the market for internationally traded goods and services that allow for rising standards of living over time.

ANS (13) A Balanced Budget is a budget in which revenues are equal to expenditures. A Balanced Budget decreases interest rates, increases saving and investment, shrinks trade deficits and helps an economy grow faster in long-term.

ANS (14) The IS /LM model which stands for "investment-savings, liquidity -money "is a Keynesian macroeconomic model that shows how the market for economic goods (IS) interacts with the loanable funds market (LM) or money market.

ANS (15) The Discount Rate refers to the Interest Rate charged to the commercial banks and other financial institutions from the loans they take from the Federal Reserve Bank through the discount window loan process, and, second the discount rate refers to the interest rate used in the Discounted Cash Flow (DCF).

ANS (16) The IS relation is the other building block of the ISLM model, along with the LM relation. The LM relation shows us how the interest rate depends on the income in the economy through the relationship between supply and demand in the money market.

ANS (17) The LM curve shows the combinations of interest rates and levels of real income for which the money market is in equilibrium. It is an upward sloping curve representing the role of finance and money. Transactions demand is positively related to real GDP (represented by Y and also referred to as income ).

ANS (18) The policy mix is the combination of the country's monetary policy and fiscal policy. The Fiscal Policy encompasses taxes and government spending, and Monetary Policy encompasses the money supply and interest rates. The Fiscal Policy is used when the policymakers believe that the economy needs outside help in order to adjust to the desired point. Typically a government has a desire to maintain steady prices, an employment level and a growing economy.

ANS (19) The adjustment policies which are used to achieve full employment with price stability and equilibrium in the balance of payments. Internal Balance refers to full employment or a rate of unemployment of no more than, say 4-5 per cent per year and a rate of inflation of not more than 2 or 3 per cent per year. External Balances refers to equilibrium in the balance of payments.