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Chapter 15: Problem 16

According to market monetarists, what problems might arise from a sharp decline in Nominal GDP?

Short Answer

Expert verified
A sharp decline in Nominal GDP could lead to an economic recession, increased unemployment and decreased government spending on public services.

Step by step solution

01

Understanding Nominal GDP

Nominal GDP (Gross Domestic Product) represents the economic output of a country without adjusting for inflation. It reflects the value of all goods and services produced by an economy within a certain period.
02

Understanding Market Monetarists

Market Monetarists are economists who argue that central banks, which control the monetary system, should aim to stabilize the growth rate of Nominal GDP to maintain economic stability.
03

Roll of Nominal GDP in economy

Nominal GDP is an important measure of economic output. High nominal GDP reflects good economic productivity, while a low nominal GDP may indicate economic problems.
04

Problems from a sharp decline in Nominal GDP

A sharp decline in Nominal GDP could create potential problems. These could include: a) Economic Recession: Dramatic decreases in GDP can cause a recession. b) Unemployment: A falling GDP might lead to reduced business revenue causing layoffs and higher unemployment rates. c) Decreased government spending: Government income is largely based on taxing economic output. A lower GDP means less tax revenue, leading to reduced government spending on public services.

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Most popular questions from this chapter

The discussion of supply and demand in Chapter 3 noted that, if two goods are substitutes for each other, the price of one and the demand for the other are directly related. For example, if Pepsi-Cola and Coca-Cola are substitutes, an increase in the price of Pepsi-Cola will increase the demand for Coca-Cola. Suppose that bonds and stocks are substitutes for each other. We know that interest rates and bond prices are inversely related. What do you predict is the relationship between stock prices and interest rates? Explain your answer.

According to the theory of patterns of specialization and sustainable trade (PSST), economic activity can decline in the face of unchanged aggregate demand. How so?

Suppose the combination of more accurate data and better forecasting techniques would make it easy for the Fed to predict a recession 10 to 16 months in advance. Would this state of affairs strengthen the case for activism or nonactivism? Explain your answer.

Explain how the Keynesian transmission mechanism works.

Why is the demand curve for money downward sloping?
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