# Assessment Question Week 7

Question 1

1.

Monopolistic competition is an imperfectly competitive market in which all the producers produce commodities that are differentiated in nature. The firms that make production decisions in this market aims at maximizing the total profit by the way of adjusted equilibrium output (Dhingra and Morrow 2019). The equilibrium condition requires Marginal Revenue (MR) = Marginal Cost (MC). The diagram given above depicts that MR and MC are equal at the point where price is 12.5 and the output is 40 and this point profit is being maximized.

1. In the imperfectly competitive market firms are protected by barriers to entry and exit and it becomes a challenge for the new entrants. In this case, barriers to entry are related to high level of start-up costs and it prevents new firms to enter the underlying industry. Thus, barriers to entry are beneficial for the existing firms and they can protect their profits.

# Question 2

GDP deflator is defined as a ratio of nominal to real GDP times 100 of the economy.

Nominal GDP for 2018 = ? Price of Goods at current year * Quantity of production of Goods at the current year

= 2*55,000 + 2.50*98,000 + 24500*45,000 + 120*110,000 + 7000*6000 + 70*145,000 + 3.50*2300 + 1.20*6,500 + 1.50*850 + 8.50*4,800 +25*450 + 3.75*600 + 2.50*7,500

= 1168295175

Real GDP for 2018 = ? Price of Goods at base year * Quantity of production of Goods at the current year

= 1.50*55,000 + 2*98,000 + 23,000*45,000 + 100*110,000 + 5,000*6,000 + 50*145,000 + 2.50*2300 + 0.80*6500 + 1.10*850 + 6.50*4800 + 15*450 + 3.25*600 + 230*7500

= 1085305285

GDP Deflator = (Nominal GDP/Real GDP)*100 = (1168295175/1085305285)*100

= 107.65

Here, value of Real GDP is higher than value of nominal GDP for the Goodland Republic and the contribution of this organization to national income is significant (Ashley and Sun 2017). Real GDP is important to track the rate by which the economy grows without any effects on inflation rates and real GDP.

# Question 3

Random fluctuations occur in the business cycle that affects economic growth and they can be characterized as economic boom and bust. Important components are demand-side causes and supply-side causes. Demand-side elements are interest rates, the credit cycle is also known as Minsky moment, and multiplier effects, housing prices, the confidence of the consumers for businesses and changes in real wage rates and accelerator impacts on the states' investment (Fernández-Villaverde and Guerrón-Quintana 2020). Supply-side elements are- technological shocks, productivity rate changes, monetary policy and, inventory cycles, and demographics. Economies are located on the business cycle based GDP value related to them.

# Question 4

1. The required impact of the inflation rate on bank term deposit = \$200,000*5%*6% = 600
2. Total labor force of the economy = Total Employed + Total Unemployed = (13.5 + 0.7) million

= 14.2 million

Number of individuals not in labor force = (20.8 – 14.2) million = 6.6 million

Structural unemployment occurs in Australia when skilled laborers do not get work as per their qualifications and skills (Cusbert 2017).

# Question 5

Government expenditure is the significant component of national income that can be measured in monetary terms. It is spent by the public sector to provide services for the sectors like social protection, defense, healthcare, education, etc (Coyle 2017).

The aggregate demand curve has a downward trend because the increase in price leads to lower spending power, high disposable income for consumers and high spending, rise in demand for exports of the economy.

# References

Ashley, R.A. and Sun, X., 2017. Gross Domestic Product (GDP). The American Middle Class: An Economic Encyclopedia of Progress and Poverty [2 volumes], p.190.

Coyle, D., 2017. GDP: A Brief but Affectionate History. The Quarterly Journal of Austrian Economics20(1), p.97.

Cusbert, T., 2017. Estimating the NAIRU and the Unemployment Gap. RBA Bulletin, June, pp.13-22.

Dhingra, S. and Morrow, J., 2019. Monopolistic competition and optimum product diversity under firm heterogeneity. Journal of Political Economy127(1), pp.196-232.

Fernández-Villaverde, J. and Guerrón-Quintana, P.A., 2020. Uncertainty shocks and business cycle research (No. w26768). National Bureau of Economic Research.

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