Answer to Question #175364 in Finance for kris

Question

The table below shows information about the closed economy.

Real GDP (RM million) Aggregate Expenditure (RM million) 

850 880

900 920

950 960

1000 1000

1050 1040

a) If the full employment level of income is RM1, 350 million,

i) state whether the above economy is facing an inflationary gap or deflationary gap. Give your reason.

ii) what is the effect of the gap that you named in [a(i)] to the above economy.

iii) calculate the required aggregate expenditure changes needed to eliminate the inflationary gap or deflationary gap.

b) If the full employment level of income is RM850 million,

i) state whether the above economy is facing an inflationary gap or deflationary gap. Give your reason.

ii) what is the effect of the gap that you named in [b(i)] to the above economy.

iii) calculate the required aggregate expenditure changes needed to eliminate the inflationary gap or deflationary gap.

Answer 1

a). Deflationary gap. The real GDP is below full employment

this is due to fall in aggregate demand due to fall in aggregate investment

ii] Economic growth is well below the average trend rate of growth i.e. aggregate demand is increasing at a slower rate than productive capacity

iii] $Rm \ 1350-1000=Rm\ 350\ million$

b) Inflationary gap . The real GDP is above full employment.

ii] An increase in government expenditure or increase in private investments

iii]$Rm\ 1000-850=Rm 150 \ million.$