IGCSE Economics Paper-2: Specimen Questions with Answers 31 - 32 of 100

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Passage

In developing countries, inflation is not purely a monetary phenomenon. Factors typically related to fiscal imbalances, driving higher money growth and exchange rate depreciation, dominate the inflation process in developing countries.

Question 31 (5 of 5 Based on Passage)

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Short Answer▾

What do you mean by inflation?

Explanation

  • Inflation is defined as the rise in the prices of goods and services of day to day use, like food, clothing, housing etc.
  • Inflation is the increase in the prices of goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Average Price change in various commodities and services are measured through inflation overtime. The opposite of inflation is known as deflation which refers to the fall in the price index of this basket of items. Inflation indicates the fall in the purchasing power of a person i.e.. fall in the unit of a country՚s currency. Inflation is measured in percentages. Central government authority measures inflation and oversees adopting measures to make sure the smooth functioning of the economy.

Passage

In the recession that began in late 2007 in the United States, the first main element of GDP that faltered was the part of investment called residential structures. When housing prices started falling in 2006, new home construction slowed down. In 2008, this sector had shrunk by more than 40 % from where it had been just a few years earlier.

Question 32 (1 of 5 Based on Passage)

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Short Answer▾

In the first sentence it is given that “In the recession that began in late 2007 in the United States, the first main element of GDP that faltered was the part of investment called residential structures” What does Residential investment mean?

Explanation

Residential investment includes all types of residential construction, whether it is an apartment house or individual homes, residential technological equipment such as computers and software. When there is an addition to the stock of private it is called Gross Private Domestic Investment (GPDI) . GPDI has 4 categories of investment. Apart from residential investment other components of investment are:

  • Nonresidential Structures: Construction of business structure like private buildings, office, warehouse, factories, hospitals, universities, and other structures which leads to the production of goods and services. A structure is included in GPDI only during the period in which it is constructed. It can be put on sale several times after being constructed, but such repeated sales are not counted as investment. Total sale is not a part of GDP.
  • Nonresidential Equipment and Software: Any business equipment which is expected to last more than a year like computers and software, machinery, trucks, cars, and desks, telephones are nonresidential equipment and software. In the period when they are produced only then they are counted as investment.
  • Change in Private Inventories: Private inventories are a component of the nation՚s capital stock, because from those inventories other goods are produce. All private inventories are considered as capital additions to private inventories which are therefore investment. If a private inventory falls it is regarded as negative investment.
  • Economic recession: is defined as period of decline in the economic activity and a drop in the stock market, a rise in the level of unemployment, and a fall in the housing market. Phase of recession is less adverse than the depression phase. The reason for a recession falls on the leadership of the country.

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