IGCSE Economics Paper-2: Specimen Questions with Answers 33 - 34 of 100

Passage

In the recession that began in late 2,007 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 2,006, new home construction slowed down. In 2,008, this sector had shrunk by more than 40% from where it had been just a few years earlier.

Question 33 (2 of 5 Based on Passage)

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Short Answer▾

How important is investment?

Explanation

  • Productivity in a business is largely determined by the investment choices that had been made before you began to work.
  • The kind and quality of capital you had to work with strongly influenced your productivity. Capital is available due to the investment choices made by the business.

  • Investment adds to the nation’s capital stock. An increase in capital shifts the aggregate production function outward, increases the demand for labor, and shifts the long-run aggregate supply curve to the right.

  • Investment therefore affects the economy’s potential output and thus its standard of living eventually.

  • Investment is a component of aggregate demand. A change in investment will shift the aggregate demand leading to a change in real GDP and the prices in the short run.

  • An increase in investment shifts the aggregate demand curve to the right; a reduction shifts it to the left.

Question 34 (3 of 5 Based on Passage)

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Short Answer▾

How recession does affect GDP?

Explanation

Recession is defined as a decline in economic activity spread across the economy that lasts for more than few months for a longer period.

Recession Indicates Indicate the Economic Results of A

  • a loss of jobs
  • a decline in real income

  • a slowdown in industrial production and manufacturing

  • Slump in consumer spending.

    • A standard definition of recession is “two consecutive quarters of negative GDP growth. ” Business that was prospering earlier, at the time of recession is exposed to risk, reduction in the size of scale of production. Due to recession there will be a drop in the levels of investment and spending and will put a pressure on prices leading to slump in the aggregate. GDP will decline and rate of unemployment will increase as companies will start laying-off workers to cut the cost.

    • At the microeconomic level, firms will experience a decline in the margin of profit during the phase of recession. Firm look towards cutting cost whenever there is a decline in the sales or investment of the firm. A firm during recession may stop producing low-margin products or reduce the compensation of employees. It may also try to obtain temporary interest relief through re-negotiation with creditors.

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