Question

1.Read the statement below carefully, and decide whether it is true or false. And then EXPLAIN your answer (whether “true “ or “false”). Regarding interest rates, actual (or realized) real rates can be negative but nominal rates cannot be negative.

2.The net-export effect suggests that if an economy’s price level decreases, then the economy’s net exports will decrease. - True/False explain

3. Cost-push inflation can also be described as stagflation. - True/False explain

4.Automatic fiscal stabilizers tend to turn the federal budget balance into a deficit (or increase an existing deficit) during a period of rapid GDP growth.- True/False explain

5.When the federal budget deficit decreases, that also means that the national debt is decreasing. True/False

Answer 1

1) True. The real interest rate or actual interest rate can be negative. This actual interest rate will determine the inflation rate and it may change according to the fluctuations of inflation rates. This actual interest rate become negative when the inflation rate become higher than the nominal interest rate. On the other hand, the nominal interest rate cannot be negative. The banks should pay money to borrow money from us, when the nominal interest rate is negative. So most of the economies tried to keep the nominal interest rate in a given rate which is not a negative value.
2) True. The falling price will reduce the net export of an economy. Exchange rate played an important role in determining the net export and import. If the price level falls down, the specific goods and services become expensive in the foreign market. This will reduce the demand for goods and services in the domestic market and retards the net export also. At the same time, the falling price will boost the level of import at cheap rate and make the export more expensive.
3) True. The cost push inflation can be considered as an important measure to determine the stagflation of the economy. Thus the cost push inflation occurred due to the rise in cost of production. The shock in aggregate supply, huge price rise of machinery, rising wage rate etc. were add to the cost of production. The rise in each of the production cost will lead to stagflation in the economy. Stagflation can be avoided at all costs.
4) False. The automatic stabilisers were used to make proper policies during the period of low economic growth. At high GDP growth rate, these mechanisms were stunted and some other real factors will influence the high level of GDP growth. These automatic stabilisers will not lead to the deficit of fiscal balances. Most of the automatic fiscal stabilisers were functioned and controlled by the government itself. So this will not lead to a deficit in the balanced budget.
5) True. Rising federal budget deficit is the main reason for increasing national debt. The reduction in the budget deficit by using proper policies will reduce the overall debt of a nation. Thus the level of borrowing also reduced. This falling budget deficit will be based on the government imposed policies which boost production and economic activities. This kind of measures will reduce the debt existed in the economy.