1 Does it appear to you that the economy is likely to be rel

1 Does it appear to you that the economy is likely to be relatively stable or relatively unstable? Which component of spending is most (least) likely to contribute to overall instability: consumption, investment, government, exports, or imports?

2. Explain the difference between recessionary gap and inflationary gap. Discuss how a \"conservative\" and a \"liberal\" might differ in the types of policies they advocate to counteract a recessionary gap.

Solution

1.

Economy is showing the progressive GDP growth with unemployment rate of just over 4% and inflation rate of 2%. At the same time, Fed is increasing the Federal fund rate, to regulate the growth. These developments give an indication that economy is relatively stable where the consumption spending is regulated.

Consumption is most likely to add instability as it is strongly related to employment, interest rate and consumer confidence.

Investment is least likely to add to the instability as it is part of planning and it doesn\'t change quickly.

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