a) Indicate whether the following statements are true or false. Provide an explanation for your answer:...

a) Indicate whether the following statements are true or false. Provide an explanation for your answer:

i. The most important role of money is to serve as a store of value.

ii. An increase in the money supply will shift the AD curve upwards and to the left.

iii. Rising output coupled with falling prices is called stagflation.

iv. A cut in taxes will shift the aggregate demand curve upwards and to the right.

v. Free trade is based on the principle of comparative advantage.

vi. A tariff is a tax on domestic goods and services.

Solutions

Expert Solution

i) FALSE. The most important role of money is not to serve as a store of value. The most important role of money is to serve as a medium of exchange. This is the primary role of the money in economy. This leads to specialisation in the economy as the acts of of buying and selling get separated.

ii) FALSE. An increase in the money supply increases the aggregate demand by lowering interest rate and increasing investment expenditure. As a result the AD Curve will shift upwards and to the right.

iii) FALSE. Rising output coupled with falling prices is not called stagflation. Stagnant output coupled will rising Prices is called stagflation.

iv) TRUE. A cut in the taxes increases the disposable income of the consumers in the economy. increase in disposable income leads to an increase in the consumption Expenditure which increases the aggregate demand. As a result, AD Curve shifts Upwards and to the right.

v) TRUE. Free trade it is based on the the principle of comparative advantage that was put forward by David Ricardo.

vi) FALSE. A Tariff is a tax on foreign goods and services that a country demands. In other words a tariff is a tax on the Imports of the country.

Rahul Sunny answered 1 year ago

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