Part one: Multiple choice Question

1.C

2.A

3.B

4.A

5.C

6.D

Part Two: Discussion Questions

1. Discuss and differentiate the four types of market structures.
Market structures can be classified into four types: perfect competition, monopolistic competition,
oligopoly, and monopoly. Perfect competition involves a large number of small firms producing
homogeneous products, with no barriers to entry or exit. Monopolistic competition involves many firms
producing differentiated products, with low barriers to entry. Oligopoly involves a few large firms
dominating the market, often with interdependence in decision-making. Monopoly involves a single firm
dominating the market, with significant barriers to entry.

Market structures play a crucial role in determining the behavior of firms in a market and the outcomes
for consumers. In perfect competition, firms are price takers, meaning they have no control over the
price of their product. This leads to an efficient allocation of resources and a situation where no
individual firm has the power to influence market price. Monopolistic competition, on the other hand,
allows for product differentiation, giving firms some control over pricing and leading to non-price
competition through advertising and branding

Oligopoly is characterized by a small number of large firms, leading to interdependence among them.
Actions taken by one firm can have significant effects on others, leading to strategic decision-making and
the potential for collusion. Monopoly, as the most extreme form of market structure, involves a single
seller with significant market power, allowing the firm to set prices and restrict output, potentially
leading to inefficiencies and higher prices for consumers.
2. Explain the difference between GNP & GDP and the three basic approaches
(expenditure, income & product approach) that are used to measure national
income account

Gross National Product (GNP) measures the total value of all final goods and services produced by the
residents of a country in a particular period. Gross Domestic Product (GDP) measures the total value of
all final goods and services produced within the borders of a country in a particular period. The three
basic approaches to measure national income are the expenditure approach (total spending on goods
and services), income approach (total income earned by individuals and businesses), and product
approach (total value added at each stage of production).

Moving on to national income accounting, Gross National Product (GNP) and Gross Domestic Product
(GDP) differ in their scope. GNP includes the income earned by a country's residents, whether they are
located domestically or abroad, while GDP focuses on the value of goods and services produced within a
country's borders, regardless of the nationality of the producers. These measures provide insights into
the overall economic performance of a country and are essential for making comparisons across nations.

The three basic approaches to measure national income accounts provide different perspectives on
economic activity. The expenditure approach sums up all expenditures made on final goods and
services, including consumption, investment, government spending, and net exports. The income
approach adds up all incomes earned by factors of production, such as wages, profits, and rents. The
product approach calculates the value of all goods and services produced within an economy, providing
a comprehensive measure of economic output.

3. Differentiate between nominal GDP and real GDP and decide which is better to
measure Economic performance;
Nominal GDP is calculated using current prices, while real GDP is adjusted for inflation, calculated using
constant prices. Real GDP is better to measure economic performance as it accounts for changes in price
levels, providing a more accurate reflection of an economy's production.

Moving on to national income accounting, Gross National Product (GNP) and Gross Domestic Product
(GDP) differ in their scope. GNP includes the income earned by a country's residents, whether they are
located domestically or abroad, while GDP focuses on the value of goods and services produced within a
country's borders, regardless of the nationality of the producers. These measures provide insights into
the overall economic performance of a country and are essential for making comparisons across nations.
When it comes to GDP, differentiating between nominal and real GDP is important. Nominal GDP
measures the value of goods and services at current market prices, without adjusting for inflation. Real
GDP, on the other hand, adjusts for changes in price levels over time, providing a more accurate
measure of an economy's output. Real GDP is considered better for measuring economic performance
as it accounts for the impact of inflation, allowing for more meaningful comparisons of economic activity
over time.

4. Explain the concept of business cycle;

The business cycle refers to the fluctuations in economic activity over time, typically characterized by
periods of expansion, peak, contraction, and trough. During expansion, the economy grows, reaching a
peak before entering a contraction phase, leading to a trough, and then the cycle repeats.

The business cycle captures the cyclical nature of economic activity. During an expansion, economic
output and employment levels increase, leading to higher wages and increased consumer spending. This
growth eventually reaches a peak, after which economic activity levels off. A contraction follows, leading
to reduced output, increased unemployment, and decreased consumer spending, ultimately resulting in
a trough. Understanding the business cycle is crucial for policymakers and businesses to anticipate and
respond to economic fluctuations.

5. Briefly discuss the types of unemployment and differentiate them

The types of unemployment include frictional (temporary unemployment during job transitions),
structural (mismatch between skills and available jobs), cyclical (unemployment due to economic
downturns), and seasonal (unemployment due to seasonal work patterns). Frictional and structural
unemployment are considered voluntary, while cyclical and seasonal unemployment are involuntary.

Unemployment is a key indicator of economic health and can take various forms. Frictional
unemployment occurs as individuals move between jobs and can be considered a natural part of a
dynamic labor market. Structural unemployment arises from a mismatch between the skills of job
seekers and the requirements of available jobs. Cyclical unemployment is linked to fluctuations in the
business cycle, with increased unemployment during economic downturns. Seasonal unemployment
occurs due to predictable fluctuations in demand, such as in agricultural or tourism sectors.
6.What does that mean by inflation? Causes of inflation, types of inflation and its
impact on the economy.

Inflation refers to the sustained increase in the general price level of goods and services in an economy.
Causes of inflation include demand-pull (increased demand outstripping supply), cost-push (increased
production costs passed on to consumers), and built-in inflation (wage-price spiral). Types of inflation
include moderate inflation, hyperinflation, and deflation. Inflation can impact the economy by reducing
purchasing power, affecting savings, and distorting investment decisions.

Inflation refers to the overall increase in prices of goods and services in an economy over a period of
time. It is typically measured by the Consumer Price Index (CPI) or the Wholesale Price Index (WPI).

Causes of Inflation:
1. Demand-Pull Inflation: This occurs when aggregate demand exceeds the supply of goods and services.
It is often caused by increased consumer spending or government expenditure.

2. Cost-Push Inflation: This occurs when the cost of production increases, leading to an increase in
prices. Factors such as rising wages, raw material costs, or taxes can contribute to cost-push inflation.

3. Built-in Inflation: This occurs when inflationary expectations become embedded in the economic
system. For example, workers demanding higher wages in anticipation of future price increases.

Types of Inflation:
1. Moderate Inflation: This refers to a gradual increase in prices, usually within a range of 2-4% annually.
It is considered healthy for the economy as it encourages spending and investment.

2. Galloping Inflation: This refers to a rapid and accelerating increase in prices, often exceeding 10% per
year. It can severely disrupt economic stability and erode purchasing power.

3. Hyperinflation: This is an extreme form of inflation characterized by extremely rapid and out-of-
control price increases. It typically occurs during periods of economic and political instability.

Impact of Inflation on the Economy:

1. Reduced Purchasing Power: As prices rise, the value of money decreases, and individuals can buy
fewer goods and services with the same amount of money.
2. Income Redistribution: Inflation can impact different groups of people disproportionately. For
example, lenders may lose out if inflation erodes the value of the money they receive back as loan
repayments.

3. Uncertainty: High and unpredictable inflation rates can create uncertainty for businesses and
investors, making it difficult to plan for the future.

4. Distorted Price Signals: Inflation can distort price signals, making it harder for individuals and
businesses to make rational economic decisions.

5. Increased Production Costs: Inflation can lead to higher production costs, including wages, raw
materials, and energy, which can reduce profitability and hinder economi

7. Explain budgetary deficit and its ways of financing.

Budgetary deficit refers to a situation where a government's expenditures exceed its revenues in a given
fiscal year. It is also known as a fiscal deficit. Governments can finance budgetary deficits through
various means:

1. Borrowing: Governments can borrow money by issuing treasury bonds or bills. This borrowing can be
from domestic or foreign sources, such as individuals, banks, or other countries.

2. Printing Money: In extreme cases, governments may resort to printing money to finance their deficits.
However, this can lead to inflation if the increased money supply is not matched by an increase in goods
and services.

3. Selling Assets: Governments can sell state-owned assets, such as land, buildings, or companies, to
generate revenue and finance deficits.

4. Increasing Taxes: Governments can raise taxes to generate additional revenue and cover the deficit.
This can include raising income taxes, sales taxes, or introducing new taxes.

5. Cutting Expenditures: Governments can reduce their spending in various areas, such as public
services, infrastructure projects, or defense, to lower the deficit.