Question

1. What is the impact on GDP if consumer spending increases? Would the answer be different if the consumer spending were directed toward foreign goods?
2. What differentiates inflation and deflation?
3. What is the Fed? What are its economic goals?
4. How does the Fed pursue its economic goals? How may the tools of monetary policy affect securities prices?
5. What are M1 and M2? How does the Fed alter M1 and M2?
6. If the Fed finances the federal government’s deficit, what will happen to the supply of money?

Answer 1

Ans. 1

GDP refers to the money value of all final goods and services that are produced within the country during specified period of time. GDP is calculated on annual basis as well as on quarterly basis.

The most widely used method to calculate GDP is expenditure method. This method aims to collect data on expenditure side by adding household spending, government spending, business investment and Net exports.

GDP by Expenditure Method = consumption Expenditure + Gross private Investment + Government Spending + Net Exports (Export - Import)

So, when the consumer spending increase, the overall GDP rises. Higher consumer spending denotes to higher growth rate in the economy. In most economies consumer spending amount to 60-70% of GDP value.

But when consumption is directed toward the Imported goods, then it leads to decrease in GDP by the amount of imports. Higher imports gets subtracted from GDP and reduces the savings within the economy.

Ans.2

Inflation is the sustained increase in the general price level of goods and services in an economy during a specified period of time. When inflation rises, each unit of currency buys fewer goods and services over a period of time. Money performs the function of store of value. This value gets eroded gradually over a period of time and results in fall in the purchasing power of the currency.

Deflation means decrease in the price level of goods and services in an economy over a specified period of time. Critics are mostly against deflation, but it can be good or bad. . Sustained deflationary pressure in the economy results in fall in production output and higher unemployment.