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Anyone help on economics questions?? Please.......

Former MemberFormer Member Posts: 1,876,323 The Mix Honorary Guru
edited March 27 in Work & Study
Can anyone help with any of the following economics questions. I have done 12 but cant find the answers to these. I need to know if each statement is true or false with a brief explanation/description. If anyone can help with any of them Id be very grateful


1) If the UK government is required to balance its budget (by the EU or World Bank for example), then it cannot set fiscal spending (G) independently from tax policy.

2) When output as measured by GDP falls, society must be worse off

3) A Fall in the demand for exports will result in lower interest rates

And I also have one more question which I could do with a bit more inof o on:

Explain how a permanent rise in interest rates will have a greater effect on the current level of consumption and investment than a temporary rise in interest rate.

Thanks a lot.....
Lucy x
Post edited by JustV on

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    Former MemberFormer Member Posts: 1,876,323 The Mix Honorary Guru
    Okay, first of all, I'm not an economist, I'm a geographer. But.

    Regarding #2.

    If GDP falls, society must be worse off.

    This is not necessarily true. It depends how you measure the "welfare" of society. If you use GDP as a mean indicator, then it overlooks disparities, e.g. Saudi Arabia has a relatively high GDP, but most wealth is concentrated in the sheiks, and hence "society" is not very well off. Other indicators, e.g Physical Quality of Life Index, which is a composite indicator, and takes account of literacy, IMR, etc, is a better indicator of social wellbeing. But, to some extent, the degree to which these can be altered depend on the capital input provided by GDP.

    Make of it what you will.
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    Former MemberFormer Member Posts: 1,876,323 The Mix Honorary Guru
    This concerns the last question you asked about interest rates...only a bit of information gathered mainly from my own knowledge so you'll need to add stuff to it!

    With a rise in interest rates, projects have a lower rate of return than the cost of borrowing, so they are less profitable, and hence investment decreases. So, instead of investing, people spend more so overall consumption increases.
    The reason why higher interest rates permanenty would have a greater effect on investment and consumption is because interest rates are generally very fluctuating, ie. high/low interest rates may not exist for long, and because, especially, firms borrow over long periods of time, they may be less confident about investing.
    If higher interest rates were there to stay, investors would have much more confidence in their financial actions. High interest rates for only a short period of time would result in less confidence about the future so yes it is true that consumption would increase and investment decrease, but to not such a significant extent.

    However, interest rates are not as important in determining consumption and investment intentions as theory suggests. For example, with firms, not all investment is financed by borrowing, so interest rates don't play a part here. Rather than interest rates, it is expectations/prospects which act as a key element in determining intentions. It is confidence about the future state of the economy. If interest rates remained the same permanently (ie. concerning your question, high but completely stable), then the future economy would be very predictable and there is less doubt in the benefits of either consuming or investing.

    hope this has helped a bit!! x

    [ 24-02-2002: Message edited by: RubySoho ]
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    Former MemberFormer Member Posts: 1,876,323 The Mix Honorary Guru
    Originally posted by Federer:
    <STRONG>Can anyone help with any of the following economics questions. I have done 12 but cant find the answers to these. I need to know if each statement is true or false with a brief explanation/description. If anyone can help with any of them Id be very grateful

    3) A Fall in the demand for exports will result in lower interest rates


    Thanks a lot.....
    Lucy x</STRONG>

    It depends whether or not the export industry is labor intensive or capital intensive. Capital intensive industries will be affected more by a change in interest rates than labor intensive ones. If I remember correctly the cost of capital (interest rates) will decrease when exports of the capital intensive product decreases because the demand for capital is lowered. The same thing happens to the labor intensive industry if it's exports are affected, the cost of labor (ie. the minimum wage) is reduced because the demand is less.

    I haven't taken macro in about three years, so you might want to run this by someone else, but I think its right.

    I also think the first question is true, but I can't really give you an answer why.

    Good luck.
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