Question

1. laws of demand and supply
2. GDP
3. Keynesian theory (running a deficit or surplus)
4. Examples of fiscal policy
5. Tools of monetary policy

Answer 1

1. Laws of demand and supply

Laws of demand and supply describe the relationship between demand of goods and its supply. It also explains its effects on price of product. It explain how the price of any product is determined by demand and supply of that product. There are four basic laws of Demand and Supply:

1. If demand increases and supply of that product remain same then it will leads to higher equilibrium price and high quantity.
2. If demand decreases and supply remains the same then it will leads to lower equilibrium price and lower quantity.
3. If supply decreases and demand remains the same then it will leads to higher equilibrium price and lower quantity.
4. And if supply increases and demand remains the same then it will leads to higher equilibrium price and lower quantity.

2. GDP

Gross Domestic Product is defined as the total final value (Monetary value ) of all final goods and services producer within the particular geographic territory of a country during the specific time period, generally one year. Gross Domestic Product is considered an important indicator of measuring the economic growth and development of any country.

Gross domestic products includes all public, private consumption, investments, private inventories, foreign balance trade, government outlays.

GDP can be measured in three different methods:

1. Income Method:

GDP= GDP at factor cost+ Tax- Subsidies.

2. Output Method:

GDP= Real GDP- Tax + Subsidies

3. Expenditure Method:

GDP= Consumption expenditure + Investment Expenditure + Government spending (Export – Imports).

3. Keynes’s Theory of running a deficit:

According to the Keynes theory of deficit spending , decreases in consumers spending could be balanced by equivalent increases in govt. deficit spending. According to his theory, by doing so, govt. can keep the balance of demand and also avoid the high level of unemployment. He further explained that once economy reached to its full employment, market can come back to its more moderate approach and deficit could be repaid. More government spending could causes inflation but Keynes believes that to control the inflation, government could raise taxes and evacuate extra capital from economy. According to Keynes, the major role of deficit spending is to stop the rising unemployment level during recession.

4. Examples of Fiscal Policy:

Fiscal policy is defined as the government spending and taxation policy use to maintain economic stability in economy.

Two types of Fiscal Policies used by Government and Example of fiscal policy:

1. Contractionary fiscal policies: Increased regulations, decrease govt. spending and increases taxes
2. Expansionary fiscal policy: increased govt. spending, decreased regulations (deregulations) and decreased taxes

5. Tools of Monetary Policy:

There are three Main tools of Monetary Policy:

1. Open market Operations: In open market operation, Central bank buy and sell securities. These securities buy from or sold out to the country’s private banks. when Central bank sells their securities to private banks, it reduces its cash holdings and when it buys securities, is increases cash to the bank’s reserves which results into providing more cash to lend.

Central banks buy securities when they want expansionary monetary policy and sold securities when they want contractionary monetary policy.

2. Discount rate/ Lending: Discount lending is the rate which central Banks charges to its members for borrowing at discount rate.
3. Reserve requirements: it refers to the money that banks must keep on hand for the night. High reserve requirement id contractionary which gives less money as loan to banks, whereas low reserve requirement is expansionary and allow banks to lend more deposits.