Question

1.What are the three main causes of inflation?

2.    Name the factors that determine economic growth.

3.    What is the multiplier effect? Examples of such a situation.

4.    Provide the example of Assets.

5.    Provide the example of liabilities

6.    What is barter?

Answer 1

1. There can be many causes of inflation. Main three of them are listed below –

1. Demand-Pull Inflation – This occurs when the aggregate demand outpace aggregate supply. This may occur due to increased spending, increased money supply, etc.
2. Cost-Push Inflation – This occurs when the aggregate supply suddenly decreases due to increased costs.
3. Fluctuations in exchange rate

2. Factors that determine economic growth are –

1. Natural resources
2. Physical capital
3. Human capital
4. Technological state
5. Law & order
6. Infrastructure

3. Multiplier effect occurs when the dependent variable increases more than the increase in the independent variable. For example, if the government spending is increased by an amount G, the income of the economy increases by more than the amount G. This is the spending multiplier effect. This happens due to both primary effect and secondary effect. In primary effect, the income increases instantaneously by amount G. In secondary effect, due to this initial increase in income, consumption also increases. This increase in consumption again increases income as consumption depends directly on income. Thus the total effect is more than the initial effect.
4. Things that can produce some value are assets. Examples include – Bonds, stocks, land, mutual funds, mortgages, capital and so on.
5. Some examples of liabilities include – payable accounts, deferred revenue, payable payroll taxes, payable loans, and so on.
6. In barter, goods exchange for goods. There is no concept of money in the economy.