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Economics for Decision Making - Question 1

a) Average wage rate in the year 1975=$6.50

Average wage rate in the year 2002=$17

Consumer Price Index in 1975=42

Consumer Price Index in 2002=100 because it is the base year as per the question.

i) The rate of inflation between 1975 and 2002= (Consumer Price Index 2002- Consumer Price Index 1975)/ Consumer Price Index in 1975

= (100-42)/42

=138.10%

ii) Average hourly wage from the year 1975-2002 has to be estimated.

Given,

Average hourly wage in 1975 = $6.50

Average hourly wage in 2002 = $17

We have to find the average hourly wage in real terms for 2002. This should be done in accordance with the year 1975.

So, as

Average hourly real wage = (Average hourly nominal wage / CPI of that year) x 100

But we have to find real wage in terms of 1975, so we will divide by the CPI of 1975.

Average hourly real wage = (17/42) x 100

Average hourly real wage = 40.47

Therefore, average hourly wage in 2002 in real terms of year 1975 is $40.47.

iii) The worker that is better off is in 2002 because the wage rate is greater than that of 1975.

b) This is because borrowers benefit from the anticipated inflation since the money they pay back to the bank is worth less than the money that they borrowed.

Economics for Decision Making - Question 2

a) Currency-deposit ratio (c) = 3/100 = 0.03 

Reserves-deposit ratio (rr) = 0.04 

i) Extended money multiplier = (1 + c) / (c + rr)

= (1 + 0.03) / (0.03 + 0.04) 

= 14.71 

Thus, the value of extended money multiplier is 14.71.

ii) Amount of extra deposits in the year 2018 = $4,000 

Extended Money multiplier = 14.71 

 Final increase in supply of money = Amount of extra deposits * Money multiplier 

= $4,000 * 14.71 

= $58,840 

 Thus, the supply of money in the country will eventually rise by $58,840.

b) Simple money multiplier = 1 /reserve deposit ratio= 1 / 0.04 = 25 

Extended money multiplier = (1 + c) / (c + rr) = 14.71 

If the currency-deposit ratio(c) becomes equivalent to zero, then the value of extended money multiplier will be equal to zero.

When c=0,

Extended money multiplier = (1 + 0.00) / (0.00 + 0.04) = 1/0.04= 25 

Thus, this means that when individuals do not keep any cash in their pockets, extended money multiplier will become equal to zero.

Economics for Decision Making - Question 3

a) i) Stamp duty cut and bringing down of different purchase charges help the economy in light of the fact that the buyers and speculators (investors), put away a great deal of cash because of diminishing charges. The foreign financial specialists additionally take an enthusiasm for the acquisition of existing homes and went through a great deal of cash that improve the monetary condition of the nation (Jhinghan, 2016). Numerous nations like the United Kingdom upgraded the stamp duty and other different charges to pull in the financial specialists and improve the financial situation of their economy. Various investors receive profits by the lower charges and the nation gets monetary advantages by improving the economy with ventures.

ii) Bringing down of company charges and adding down to investment helps in developing the economic condition of a nation. These bringing down of duties and taxes give more powers to financial specialists to put away a ton of cash (Bakker and Felman, 2014). These procedures are utilized to support the economy for a brief period. It helps in defeating the deficiency and monetary deficit in the economy. By bringing down of company and organization charges, organizations and people spend and invest more cash that grows the economy. Albeit government deficiency increments, because of the greater venture and going through a ton of cash they extend and upgrade the economy.

b) “Countries with high levels of debt-to-GDP ratios are poor countries and that countries with low levels of debt-to-GDP ratios are rich countries”- I completely agree with the statement by my father. The debt to GDP ratio alludes to the capacity of the nation to deliver and sell nourishments and repaying back which includes the obligations (Yanushevsky and Yanushevsky, 2018). Nations having low degrees of debt to-GDP are rich nations. Saudi Arabia is a great example of the in the present world as it brings down its obligations by trading and various business activities. Because of the expanding consumption and utilization of oil, Saudi Arabia sends out a lot of oil and oil products due to these increments it’s GDP and decreases its obligations of debts. In addition to this, Hong Kong, Russia, and Kuwait likewise have a low debt to GDP ratio.

Economics for Decision Making - Question 4

a) In an economy recessionary gap happens when the country is conducting its economic activities below the level of full employment or in other words it is the highest optimal level that is achievable (McEachern, 2014). The economy has the capability to expand & grow, and develop much more than its present level.

If Theoretica is taken into consideration, as the rate of inflation is lower than the target range, this means that it is lower than the level of full employment. This can be illustrated with the help of a diagram:

LRAS is the long-run aggregate supply curve. SRAS is the short-run aggregate supply curve. AD is the aggregate demand curve. As indicated in the diagram the economy is operating its activities at point B as shown, which depicts the lower output, produced by the economy, and lower level of the price than the full employment level at point A as shown in the diagram.

b)The time frame of economic fall in an economy is known by the name of recession. In this period there is a fall in the monetary operations of a country. The pandemic of COVID-19 has reached all over the world, where the entire globe is encountering recessionary effects due to it. As told by my mother, the fall in the rate of interest will be beneficial during this recessionary phase. This is due to (Pettinger, 2017):

  • When a fall in the rate of interest will be there will be an increase in the borrowing by the people as the expense of lending has decreased. Additional lending implies more consumption, which is required during this period. This will improve the development of the country.
  • Likewise, similarly, the decrease in loan cost will most probably prompt speculators to get more cash and put resources into different undertakings. The ascent in demand for investment will animate aggregate demand in the nation.

c) At the point when the downturn gets extreme, and the financial specialists don't have numerous alternatives left with them to bring back the economy from the depression, at that point they receive helicopter money (Masciandaro, 2020). Quantitative facilitating can likewise be utilized in a non-so extreme circumstance, so when there is a serious downturn in the economy, specialists embrace helicopter cash, which results in an expansion in the supply of cash in the country. So indeed, in a serious downturn, helicopter cash is favored in light of the fact that it gives quick outcomes.

References for Economics for Decision Making

Jhinghan, M. L. (2016). Microeconomic theory. New Delhi: Vrinda Publications

Masciandaro, D. (2020). COVID-19 Helicopter Money, Monetary Policy and Central Bank Independence: Economics and Politics. Italy: BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Università Bocconi.

Yanushevsky, C. & Yanushevsky, R. (2018). Applied Macroeconomics for Public Policy. United Kingdom: Elsevier Science.

McEachern, W. A. (2014). ECON: MACRO4. United States: Cengage Learning.

Bakker, B. & Felman, J. (2014). The Rich and the Great Recession. United States: INTERNATIONAL MONETARY FUND.

Pettinger, T. (2017). Cracking Economics. United Kingdom: Octopus Books.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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