Term Paper

Topics: Inflation, Supply and demand, Unemployment Pages: 8 (1935 words) Published: September 13, 2013
BUECO5903 BUSINESS ECONOMICS ASSIGNMENTS A and B Semester 1, 2013 Due dates for each section are provided in the Course Description.

Part B – Macroeconomics – Worth 10% of total assessment: Answer any five (5) of the following questions. Each question is worth 10 marks.

Question 10:

a) Which of the following are final goods and services and which are intermediate goods and services? Please explain why in your answer. (4 marks – 1 mark each)

i) A windscreen purchased by a motor vehicle spare parts supplier;

Intermediate – because its initial production value has been accounted for within the National accounts (i.e. GDP) and it is being resold at a depreciated value as a second hand goods.

ii) A new bulldozer to be used by a construction company;

Final goods – however , when a construction company buys and users a new bulldozer , it Subsequently become an intermediate good when it is used in the production of others

iii) A household cleaning service purchased by a family from a domestic cleaning service company;

Final goods – as the resale value of the business comprises value added (i.e. good will etc )which Has not previously been included within the national accounts

iv) Coking coal

Intermediation goods unless being sold by exporting as it is used as an ingredient into the Production of other good such as iron and steel , steam etc.

b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods and services is sold to domestic or foreign buyers. Is this nation’s GDP $800 billion or $750 billion? Explain your answer. (2 marks)

The nation's GDP for the year is $800 billions .GDP includes the market value of final good and service

Produced, regardless of weather these products are sold . The unsold products are added to firm’s Inventories and included in gross national domestic investment .

c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods. (2 marks) Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP? (2 marks)

The new truck is a final good because it is a new product and produced for the ultimate users, The transport company and therefore it should be added to GDP

Note that this calculation is via the ‘ expenditure approach ‘ when a firm buys and uses the new truck, It subsequently becomes an intermediate good into the production (i.e. transport ) of other products in subsequent Periods.

Question 11:

(10 marks total - 2.5 marks each part)

a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram and 2.5 marks for the explanation);

Demand pull inflation is that which results from rapid increase in consumer demand causing rapid increase in aggregate demand and examples are :

1) The central bank cuts interest rate and the economy booms. This cut in interest rate would cause more spending , and more consumer and investment borrowing and less savings.

2) The government cut income tax rate and increases government expenditure at a time near full employment. Initially, the cut in income tax rate would cause household disposable income to increase which would cause aggregate demand to increase . The immediate increase in government expenditure would also cause aggregate demand to shift rightward

b) Provide (describe) two (2) causes of each type of inflation
(2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes

Cost- push inflation is mainly induced on the cost...
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