Answer to Question #208664 in Macroeconomics for Kritika

Question

Q4. What is crowding-out effect? Explain [2 marks]

Q5. a. What is Phillips curve? Draw the short-run Phillips curve and the long-run Phillips curve. Explain why they are different. <b>[2 marks]

b. Suppose the economy is in a long-run equilibrium. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagram from part (a). If the RBI undertakes expansionary/contractionary monetary policy, can it return the economy to its original inflation rate and original unemployment rate? (b) What is sacrifice ratio? [5 marks]

Answer 1

4a). Crowding-out effect is the condition in which rising interest rates lead to a reduction in private investment expenditures, thereby inhibiting the initial growth of total investment expenditures.

5a). Philips curve tends to be the inverse relationship between inflation and unemployment rate drawn graphically.

In the Philips short-run curve, unemployment rate and inflation tend to be negatively correlated; as one quantity increases, the other decreases. Similarly, in the Philips long-run curve, there is usually no compensation.

5b). I)

If RBI takes expansionary monetary policy, it can return the economy to the original inflation and unemployment rate as more income will be generated to help in creating opportunities for the citizens.

ii) Sacrifice ratio is known to be an economic ratio measuring the impact of falling and rising inflation on a nation's total output and productivity. The costs tend to relate with the slowdown in economic production due to the fall in inflation.