Inflation and its impact on consumers
False, The Consumer Price Index (CPI), for example, measures the overall price level in a country’s economy. A wide range of frequently purchased products and services are included in the CPI. Changes in a country’s currency purchasing power are measured by calculating the CPI. Oil price increases lead to an upward swing in the overall supply curve, but output falls due to a downward slope in the broad demand curve. The rise in prices will negatively impact customers’ well-being. Various factors influence inflation, but it is the most crucial indicator of overall price increases in the economy. As a result, the CPI will fall as rising inflation signals an increase in the country’s declining currency value. Energy exports are severely taxed, which means an increase in oil prices results in a budget surplus and more lavish government spending, contributing to GDP growth.
False, consumers’ purchasing power is eroded because of higher-than-expected inflation, while their incomes remain unchanged. Suppose, for instance, that with my new employment at & 800, we agreed that my salary would rise by 2% every year to keep pace with inflation in 2021. It is my goal to spend $ 700 on essentials in 2021. In other words, my income in 2022 will be $ 816 (800*2/100). I’ll have to pay 2% more for the same goods and services next year due to anticipated inflation of 2%. If inflation increases by two percent to keep up with current prices, I’ll have to fork over $714 ($700*2/100). I could maintain my standard of living from the previous year with the money I made.
If inflation increases by 10% in 2022, my cost of living will rise by 10%, but my income will only increase by 2%. Compared to last year, my yearly income is $816, and my monthly costs are $770. Consequently, I’m losing purchasing power and the capacity to maintain a certain quality of living as the rate of inflation outpaces my income growth.
True, because of the progressive character of measures aimed at reducing income disparity and promoting economic growth, the government’s policies and efforts seek to eliminate poverty and income imbalance. To help the impoverished, the government levies taxes on people’s wages. In most countries, direct taxes are the principal source of revenue. The money was used to help individuals who were in need. The government can use tax revenue to help the most vulnerable segments of society. Individual income taxes may lead to inefficiency because many people will work fewer hours to avoid paying taxes. Individuals’ motivation to labour may be reduced due to a higher tax rate, limiting their creative capacity. Reduced output can lead to lower-income levels, restricting overall economic growth. As a result, while redistribution schemes reduce economic inequality, they can also stifle economic efficiency and progress.
True, according to the World Bank, increased government financing for vaccine research will almost certainly have a favorable impact on private investment in the health care sector and residential investment. Generally, public investment (G) has a beneficial effect on private investment (I). As the government boosts financing for research grants to colleges and universities, private investment is expected to rise. This is partly due to Significant Technological Advancements that have resulted in more efficient production and more desired items. Future investment will be driven by demand for those new products. However, several other factors contribute to the positive impact of government spending on private investment. Public expenditures in vaccine research are expected to boost private investment and residential development under normal circumstances.
Role of government policies in reducing income disparity
False, When gross domestic investment surpasses domestic savings, a trade imbalance can occur (government and private savings). To calculate the trade imbalance, domestic investment is subtracted from private and government savings. When measured in terms of investment as a proportion of GDP, Australia’s open economy has a rate of investment that is 25% higher than the rate of gross domestic savings, which is 15% higher. Domestic savings must exceed the gross investment for an economy to generate a trade surplus. Surplus capital is invested in another country in a trade surplus, resulting in net exports exceeding imports.
There could be macroeconomic ramifications of the fiscal expansion that cause aggregate demand to shift in a different direction than it did when the fiscal expansion began.
As a result of fiscal expansion, powered by increased family income, consumption will rise with consumer expenditure; if aggregate demand AD = C + I + G, aggregate demand (AD) rises even more, when consumption increases.
Consumer demand rises inexorably, causing capital investment to increase as well. Businesses will find it more profitable to expand output when demand for goods and services grows while prices rise simultaneously. They intend to increase their investment in the future to produce more revenue. As a result, aggregate demand increases, resulting in more investment.
The multiplier is based on the percentage of a marginal dollar of income spent on taxes, savings, and imports compared to the rest of the income. Changes in the magnitude of leakages, such as the marginal propensity to save, the tax rate, or the marginal propensity to import, will modify the multiplier’s value. While it is true that the multiplier rises as the marginal willingness to consume rises, the multiplier falls as the marginal willingness to save rises. The multiplier value falls as the tax rate is raised.
When the government increases spending or expenditure by 120 Billion, that increase will increase real GDP by 218.16 Billion.
An economy’s production capability can generate products and services. Productive capacity is influenced by factors including the availability of natural resources, technological advancement, and the quality of a country’s infrastructure and workforce. These techniques of manufacturing and expansion have their drawbacks. For example, a population constrained to space but endowed with cutting-edge technology will be unable to produce new things. On the other hand, natural resources are finite and may run out soon.
When assessing a country’s production potential, it is critical to consider the available resources, distribution, and allocation. Highlighting any possible resources is also vital. To measure a country’s ability to enhance productivity, it must increase the productivity of its workforce and capital while also making advancements in technology.
The following factors influence a country’s ability to produce:
- Natural resources account for up to 90% of world output, making their availability extremely important. Many countries’ economies, such as Singapore and South Korea, rely on natural human resources due to a scarcity of natural resources. As a result of their commitment to education, they have generated one of the world’s largest middle classes.
- The rate at which technology has advanced; productivity is intrinsically tied to a country’s level of technological innovation. For example, if the government mandates the use of specific types of machinery to make specified commodities, and this machinery quickly becomes obsolete, businesses may be unable to grow their manufacturing capacity.
- “The quality of infrastructure, particularly transportation, is crucial for economic development and productivity,” according to the World Economic Forum’s Global Competitiveness Report. First, Construction development has exploded in emerging economies like Japan during the previous decade. Second, In 2007, China spent more money on infrastructure than any other country, with $674 billion invested. China is extending its rail network, including the Beijing-Shanghai railway and heavy industrial capability (1300 km).
- Given the essential significance of human capital in an economy, quality training and ongoing education are required to maintain the workforce competitive and ready to handle new challenges. The consequence is that proper education systems, human resource development, and equitable work opportunities for all employees should be fostered.
Technical innovation brings numerous benefits; it boosts production and provides citizens with new and improved goods and services, raising their overall standard of living by increasing revenue. The advantages of innovation sometimes take a long time to appear. They frequently affect a large portion of the population.
A technological breakthrough broadens the economy’s spectrum of production possibilities, thus widening the frontier of production possibilities. The Production Possibility Frontier (PPF) is defined as follows: An outward shift of the PPF, as seen in figure 2, is a technical advance that allows higher output from the same inputs.
- Investment in public services – Given that the economy’s investments, particularly in assets managed by publicly-owned businesses or organizations, are required for the state’s economic growth, investment in public services is vital. Investment is a response to a perceived need for specific goods, infrastructure, or services in an economy.
- Macroeconomic stability – The macroeconomic stability factor can stimulate long-term economic growth by equating various interdependent variables such as demand and output and investment and savings. These variables do not have to be the same, but they should be within a reasonable range.
Government financing and private investment
The Coronavirus outbreak has harmed Singapore’s economy, which has disrupted the supply of vital supplies. As a result, companies will recruit fewer people to work on their manufacturing lines, while other things will be underutilized or ignored altogether. The supply curve is pushed to the left as a result. As a result of lower production and higher prices, the new equilibrium swings from E1 to E2. Earnings fall and inflation rises due to the disturbance in the country’s economic supply.
A recession is a period of decreased output and employment that can lead to economic disaster if it lasts long enough. It can impact all areas of the economy and last for months. The rate of growth slows when the economy’s income falls. Due to the economy’s unpredictability, a downturn could precipitate a financial crisis resulting from job losses, and investors may be compelled to liquidate their investments. As a result, international trade and, as a result, the economies of other countries suffer.
Part B i – Assume the Central Bank is most concerned about inflation.
The bank claims that the central bank will pursue a contractionary monetary policy to keep inflation under control. People’s actual purchasing power diminishes with each reduction in the money supply imposed by the central bank, and as a result, commodity demand declines as well. As a result of these events, commodity prices have fallen.
Figure 4: Contractionary Monetary Policy
Specifically, the LM curve changes to the left when the money supply drops, the equilibrium interest rate rises, and output contracts. As a result, the AD curve shifts to the left, and the price of the asset declines with it. As a result of this new equilibrium, the system’s output falls.
Part B ii – Assume the Central Bank is most concerned about unemployment
When a central bank is concerned about falling output and rising unemployment, it will adopt an expansionary monetary policy, according to the Federal Reserve. The actual purchasing power of the general population grows in lockstep with the expansion of the money supply in a rising economy. Commodity demand rises as a result and the AD curve shifts to the right.
In the IS-LM model, expanding the money supply boosts equilibrium production and decreases the interest rate on the demand side equilibrium, increasing equilibrium output. The AD curve changes to the right in response to the shift, and the equilibrium output increases before returning to its previous position. It is now more severe than before the economy re-established its new equilibrium.
Without government aid, the economy would be forced to increase supply to return to pre-crisis levels. In a pandemic, real GDP will fall and prices will fall, creating a new equilibrium. This is because the short-run AS curve and the short-run AD curve swing to the left due to the contemporary fall in family and company spending. As a result, real GDP would fall in lockstep with a drop in the price index. If the magnitude of the shift in the AS curve were greater than the magnitude of the AD curve, the price level would have risen rather than fallen.
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