When comparing the GDP of 1950s America with 2019 America, even after you account for the inflation, you would still get a misleading result as GDP fails to account for non-monetary output and transactions. It also fails to account for the societal progress we’ve made since 1950s. There are more goods available to purchase in 2019 than in 1950 as a result 2019 GDP will be higher.
Since country measures GDP in their own currency, to compare GDPs one must convert each country’s GDP to a common currency, usually the American dollar. However, due the market fluctuation, you may always not be getting the most accurate prices. In addition, each country has differing population, it is difficult to understand if a specific country has a higher GDP due to their population size or because of actual economic reasons.
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While GDP may track the amount spent on environmental and social heath issues, it does not clearly depict the actual status of the environment or the health of a county’s population. When measuring the well-being of a person, it is not beneficial to know how much money was spent. Instead, it’s more beneficial to know the country’s infancy deaths, maternal mortality and other health related date, which GDP does not offer.
Unexpected inflation redistribute wealth is caused when the salary prices are increased at a differing rate compared to the price level. Some salaries are increased rapidly, while others increase slower. This causes the redistribution of wealth as asset prices also increase at a differing rate compared to the price level. Some asset prices increase rapidly, while other increase at a slower rate. During an unexpected inflation, creditors are typically at a disadvantage. For an example, if person A lends 3 dollars to person B prior to inflation, and person B pays back person A during inflation, the value of 3 dollars has change. Prior to inflation, Person A could have been able to purchase 3 bags of chips with $3, but during inflation, they may only be able to purchase 2. In this case, the purchasing power has lessened by 1 bag of chips.
The government would enact expansionary fiscal policies to increase their spending, and to stimulate aggregate demand. A stock market collapse would shift the AD curve to the right. This would result in
To combat inflation, the government would enact contractionary fiscal policies by raise taxes, which would result in the decrease of people’s purchasing powers and aggregate demand. The AD curve would shift to left.
Oil prices increase when the AS curve shifts left, which leads to fewer quantities. To combat this, the government would use expansionary policies to bring AD curve to the right in hopes of bringing equilibrium quantity to its original level
It’s important for the Federal Reserve or any Central Bank to be independent from the political forces to better control inflation. If the banks are tied to politics, the politicians may feel pursued to lower the unemployment by any means necessary, even by implementing expansionary polices, which in return would produce higher inflation and interest rates. In addition, the separation stops the politicians from taking advantage of the economy by manipulating the money supply to win elections.
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