ECS2602 ASSIGNMENT 1 SEMESTER 1

ECS2602 ASSIGNMENT 1 SEMESTER 1 Page 1 of 14 This assignment contributes 20% towards your semester mark. Please ensure that this assignment reaches the university before the due date. Answer all questions on a mark-reading sheet. 1. Which of the following statements are correct? a. In this module we only study the demand side of the economy, which includes the goods market and the financial market. The labour market forms part of the supply side analysis and is therefore excluded from this module. b. Gross domestic product (GDP) is the total value of all goods and services produced within the boundaries of a country in a particular period. c. If total nominal output increases by 2% during a specific year and the general price level increases by 4% the real GDP will decrease and the nominal GDP will increase. d. The impact of fiscal and monetary policy on the level of output and income is an important topic in this module. e. An expansionary monetary policy entails an increase in the interest rate to bring about a decrease in the money supply in order to decrease the demand for goods in the economy. 1. a, b, c and d 2. Only b, d and e 3. Only a, c and d 4. Only c and d 5. Only b, c and d Explanation: Statement b is correct - The GDP is the total value of all final goods and services produced within the boundaries of a country during a particular period (usually one year). Statement c is correct. If the rise in the general price level is more that the rise in nominal production (or output) then the real production (GDP) declines while the nominal production (GDP) increases. Statement d is correct - In this module, the emphasis is mainly on developing your understanding of different models on the determination of output and income (Y) and the impact of fiscal and monetary policy on the level of output and income. 2. Which of the following statements are correct? a. Expansionary monetary policy during a recession is an example of stabilisation policy. b. The main instrument of fiscal policy is the budget, while the main policy variable is the interest rate. c. A contractionary monetary policy implies a decrease in government spending and an increase in taxation. d. An increase is taxes implies the implementation of an expansionary fiscal policy. e. A decrease in the money supply implies the implementation of a contractionary monetary policy. 1. a, b and e 2. b, c, d and e 3. Only a and b 4. a, d and e 5. Only a and e Explanation: Statement a is correct – expansionary monetary policy is a stabilisation policy that can be used during a recession. Statement e is correct - A contractionary monetary policy is a decrease in the nominal money supply in order to cool down economic activity by decreasing the demand for goods.