Question

1. In some countries, price controls exist on some goods, which set maximum prices at which these goods can be sold. Indeed, the United States experienced a period of wage and price controls when the Nixon administration introduced wage and price controls in 1971. Sometimes, the existence of price controls leads to the growth of black markets, where goods are exchanged at the prices above the legal maximums. Carefully explain how price controls present a problem for measuring GDP and for measuring the price level and inflation 2. Using an idealized business cycle diagram, explain the concepts of peaks, troughs, frequency, amplitude and turning points. 3. Explain the concepts of procyclical, countercyclical and acyclical as applied to business cycles 4. Why is a tax cut not a free lunch? 5. What is the underground economy? How does it affect the measurement of GDP? 6. What are transfers? Are they included in GDP?

Answer 1

1.

Answer: as price ceiling leads to growth of underground market, and income earned from underground sources are not reported to the government hence they are not taken into consideration at the time of calculation of gdp,that would ultimately lead to gdp being predicted less as compared to what it should have been if no activity was taking place underground. Measures of prices understate inflation too. Whenever inflation measures are too low, changes in real GDP overstate the extent of increases in actual production.