Question

From a theoretical macroeconomics perspective, consider whether the following statements are true, false, or uncertain. Justify your answers.

1. An inflation target is necessary for good economic development.
   
2. In a world where all countries would have fixed exchange rates, no country would have an effective monetary policy.
   
3. In a devaluing country, borrowers who have borrowed in a foreign currency are more affected, than those who have borrowed in domestic currency.
   
4. Technological development is impossible to measure.

Answer 1

Answer a-The statement is true.

Explanation-Inflation is the rise in general price levels of the economy. From the point of view of the consumers, it isw undesirable, but many economists, businessmen, and politicians maintain that moderate or mild inflation is crucial for economic growth. Inflation is good for mainly two reasons- first because it makes consumers to expect that prices will keep rising, it will cause them to purchase more goods at present which implies increased demand in the short term. As a result, firms sell more and factories produce more, hire new workers thereby boosting economic growth. The second is when inflation removes the risk of deflation becuse when prices fall people wait to see if prices will drop more before buying. It cuts back demand and as a result, factories produce less, unemployment rises,workers have less money to spend, which reduces demand even more. Businesses lower their prices. All this creates a worst situation so inflation is better than deflation for the economy.

Answer b-The statement is true.

Explanation-There are no effects of expansionary as well as contractionary monetary policy in a fixed exchange rate system. It is effective in floating exchange rate regime. The exchange rate will not change as it is already fixed at a level, hence, changing money supply will have no effect on equilibrium GNP, and there will be no effect on the current account balance. Monetary policy is thus totally ineffective.

Answer c-The statement is true.

Explanation-Devaluation causes more loss to borrowers from foreign country than domestic country because devaluation means the reduction in value of home currency in comparison to foreign currency. It means more domestic currency is needed to buy one unit of foreign currency. When people borrowed from foreign country, they have to repay back in foreign currency as well which will now be more than before. But, as their income in domestic country will be same, the increased debt liability will be a greater burden. But, in case of domestic borrower, if will be beneficial because they now have to pay less as the currency value depreciated.

Answer d-The statement is false.

Explanation-It is not impossible to measure technological advancement. In economics, technological advancement is measured in various ways like the increase in output per head, price performance, amount of energy consumption (kardashev scale) etc. The growth competitiveness index is also a measure for technological advancement and stages of development of the economy. The structural, institutional, and policy features of economies are summarized in the Growth Competitiveness Index (GCI) measure.