Question

1. Why is China still poor in per capita terms despite having the second-largest economy in the world in terms of real GDP?
2. What is the relationship between savings, capital formation, and consumption?
3. According to Malthus, how do economic growth and population relate to each other?
4. What are loanable funds? Discuss the factors affecting the (a) the demand for loanable funds, (b) the supply of loanable funds.
5. Explain how a consumption tax could lead to a decrease in real interest rates.  
6. List the various reasons that contributed to the financial crisis that occurred in 2008.

Answer 1

Answer: ☺ ching is still poor in per capita terms despite having the second largest Economy in the world in terms of real Gop: . Real Gop shows all value of goods and services Produced in a year. . Real Gpp is in terms of goods and services rather than in money terms. • Real Gop adjusted for inflation cohile nominal Gop does not adjust for inflation Real Gop of a nation does not take into account the population of an economy : . It does not shows total production of goods and Services in the economy. . per capita in some of a nation is the ratio of total income Earned by an economy in a year and no of population. • Total income of china is higher but due to high population size, per capita income of China's individual

decreases. ochina is a country whose population is so hage, which decreases its per capita in come of an individual. 1. Thus , due to all these seasong , china has por per capita in come irrespective of gecond largeft Economy in the terms of Gopi @ Relationship between Savings , capital formation and Con smption: - Savings are the source of supply of loanable finds. when savings increase, supply of loanable finds in the market also increases. * This increase in supply results in fall in interest rates. • As anterest rate fall, cast of borrowing declines prompting businesses to borrow more. • Business es generally borrow to expand their produetion Capacity (or) invest in new projects.

• Both these endeavors results in the increased demand for capital goods or net addition of capital goods in the Economy. • This net addition of capital goods in the economy implies Capital formation" • Expansion of production capacity on back of increased of more jobs thereby capital formation results in creation raising income level of households which in turn fuels Consumption. - Reverse happens when saving decreases. · Thus there is a direct relationship between Savings, capital formation and consumption. • Increase in Savings lead to increase in capital formation! which in refult leads to increase in consumption vice versa