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Chapter 7: Q1. (page 282)

Why would an economic downturn cause problems for Chinese companies that borrowed heavily?

Short Answer

Expert verified

The economic downturn would not allow the companies to pay back their loans easily, and companies might stand bankrupt.

Step by step solution

01

Explanation

A few Chinese companies borrowed huge amounts during the expansion of the economy. Since the citizens and financial experts believed that the boom period was over and the economy was to slip into a recession, it created a fear of havoc among the investors.

The investors were worried because the aggregate demand would decline in recession, and they would have to reduce their output. A shorter output directly implies a decline in profit. If the Chinese companies’ profit would decline, they would not be able to pay off the loan and might go insolvent and permanently shut down.

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Most popular questions from this chapter

From 2010 to 2015, the price of electronic equipment fell dramatically and the price of housing rose dramatically. What are the implications of this in deciding whether to use 2010 or 2015 as the base year in calculating 2013 real GDP?

For each of the following events, how would an economist using a 10-year-old market basket create a bias in measuring the change in the cost of living today?

a. A typical family owns more cars than it would have a decade ago. Over that time, the average price of a car has increased more than the average price of other goods.

b. Virtually no households had broadband internet access 20 years ago. Now many households have it, and the price has regularly fallen each year.

Assume there are only two goods in the economy, french fries and onion rings. In 2015, 1,000,000 servings of french fries were sold at \(0.40 each and 800,000 servings of onion rings at \)0.60 each. From 2015 to 2016 the price of french fries rose by 25% and the servings sold fell by 10%; the price of onion rings fell by 15% and the servings sold rose by 5%.

  1. Calculate nominal GDP in 2015 and 2016. Calculate real GDP in 2016 using 2015 prices.
  2. Why would an assessment of growth using nominal GDP be misguided?

Consider Table 7-3 but suppose that the market basket is composed of 100 oranges, 50 grapefruit, and 200 lemons. How does this change the pre-frost and post-frost price indexes? Explain. Generalize your explanation to how the construction of the market basket affects the price index.

What are the various sectors to which firms make sales? What are the various ways in which households are linked with other sectors of the economy?
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