
Concept explainers
In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers.
- A large Increase In the
price of the homes people own. - Rapid growth in the economy of a major trading partner.
- The development of a major new technology offers profitable opportunities for business.
- The Interest rate rises.
- The good imported from a major trading partner become much less expensive.

(a)
Whether “A large increase in the price of the homes that people own” will cause inflation or recession is to be determined.
Answer to Problem 1SCQ
Inflation is the persistent increase in general price level over a period of time in an economy.
Recession is the general slowdown of economic activity.
Explanation of Solution
Large increase in the home prices leads to inflation in economy. As output remains same, demand is higher, which leads to rightward shift of AD, this will lead to increase in price level and inflation.

(b)
Whether “Rapid growth of major trading partner” will cause inflation or recession is to be determined.
Answer to Problem 1SCQ
Inflation is the persistent increase in general price level over a period of time in an economy.
Recession is the general slowdown of economic activity.
Explanation of Solution
As there is growth in trading company, it means our exports will decline, this will lead to fall in aggregate demand which will lead to fall in income, output and price level. It will lead to recession.

(c)
Whether “The development of a major new technology offers profitable opportunities for business” will cause inflation or recession is to be determined.
Answer to Problem 1SCQ
Inflation is the persistent increase in general price level over a period of time in an economy.
Recession is the general slowdown of economic activity.
Explanation of Solution
New technology means increase in productivity growth, which induces business man to invest in economy. As investment increases, aggregate demand will increase, leading to increase in output, price level. It will mitigate recession.

(d)
Whether “the interest rate rises” will cause inflation or recession is to be determined.
Answer to Problem 1SCQ
Inflation is the persistent increase in general price level over a period of time in an economy.
Recession is the general slowdown of economic activity.
Explanation of Solution
As interest rate increases, it becomes costlier for firms to invest as cost of borrowing increases. This will lead to more recession in an economy.

(e)
Whether “the goods imported from a major trading partner become much less expensive” will cause inflation or recession is to be determined.
Answer to Problem 1SCQ
Inflation is the persistent increase in general price level over a period of time in an economy.
Recession is the general slowdown of economic activity.
Explanation of Solution
As imports become cheaper, it leads to more demand of imports, thereby declining aggregate demand. As AD falls, it will lead to less output, it will increase recession.
Want to see more full solutions like this?
Chapter 12 Solutions
Principles of Macroeconomics 2e
Additional Business Textbook Solutions
Intermediate Accounting (2nd Edition)
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
MARKETING:REAL PEOPLE,REAL CHOICES
Foundations Of Finance
Financial Accounting, Student Value Edition (5th Edition)
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
- how commond economies relate to principle Of Economics ?arrow_forwardCritically analyse the five (5) characteristics of Ubuntu and provide examples of how they apply to the National Health Insurance (NHI) in South Africa.arrow_forwardCritically analyse the five (5) characteristics of Ubuntu and provide examples of how they apply to the National Health Insurance (NHI) in South Africa.arrow_forward
- Outline the nine (9) consumer rights as specified in the Consumer Rights Act in South Africa.arrow_forwardIn what ways could you show the attractiveness of Philippines in the form of videos/campaigns to foreign investors? Cite 10 examples.arrow_forwardExplain the following terms and provide an example for each term: • Corruption • Fraud • Briberyarrow_forward
- In what ways could you show the attractiveness of a country in the form of videos/campaigns?arrow_forwardWith the VBS scenario in mind, debate with your own words the view that stakeholders are the primary reason why business ethics must be implemented.arrow_forwardThe unethical decisions taken by the VBS management affected the lives of many of their clients who trusted their business and services You are appointed as an ethics officer at Tyme Bank. Advise the management regarding the role of legislation in South Africa in providing the legal framework for business operations.arrow_forward
- Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningEconomics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage LearningEconomics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning





