Your uncle comes to you with an investment idea. He tells you that the nominal GDP of Paradisia quadrupled over the past year and suggests that you invest there. Unemployment is at 20 percent and inflation over the last year was 500 percent. This opportunity seems like a:

A.) good investment given the expansion of money, the increase in real GDP, and the low unemployment rate.

B.) good investment given the neutrality of money, the increase in real GDP, and the low unemployment rate.

C.) poor investment given the neutrality of money, the decline in real GDP, and the high unemployment rate.

D.) poor investment given the neutrality of money, the increase in real GDP, and the high unemployment rate

Question

Business

Taniya Chapman

11 November, 01:26

Your uncle comes to you with an investment idea. He tells you that the nominal GDP of Paradisia quadrupled over the past year and suggests that you invest there. Unemployment is at 20 percent and inflation over the last year was 500 percent. This opportunity seems like a:

A.) good investment given the expansion of money, the increase in real GDP, and the low unemployment rate.

B.) good investment given the neutrality of money, the increase in real GDP, and the low unemployment rate.

C.) poor investment given the neutrality of money, the decline in real GDP, and the high unemployment rate.

D.) poor investment given the neutrality of money, the increase in real GDP, and the high unemployment rate

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Answers (2)

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Chaim Dominguez · Answer 1

C.) poor investment given the neutrality of money, the decline in real GDP, and the high unemployment rate.

Explanation:

Neutrality of money occurs when a change in the money stock does not influence real variables such as real consumption, employment, and real GDP; but only have impact on the nominal variables in the economy like nominal GDP, exchange rates, prices, and wages.

The unemployment rate is can be described as the share of the labor force of a country that is with no job, expressed as a percentage. Generally, an unemployment rate of between 4% and 6% is regarded as normal and healthy for a country. A higher unemployment rate can lead to a fall in the consumer spending.

Real GDP refers to an economic output that has accounted for the inflation effect. If nominal GDP is used instead of the real GDP, it would like the output of the has increased when it is price that has increased.

Based on this, there is an evidence of neutrality of money in Paradisia because it is nominal GDP that is rising not the real GDP which could be as a result of increase in money stock. This because, nominal GDP increased quadrupled over the past year, i. e. 400%, while inflation over the last year was 500 percent. Also, unemployment of 20% is far too higher than between 4% and 6% is regarded as normal and healthy for a country. Finally, it nominal GDP of Paradisia that is rising not the real GDP because inflation of 500% is greater than an increase of 400% in nominal GDP.

Therefore, the correct option is C.) poor investment given the neutrality of money, the decline in real GDP, and the high unemployment rate.

Raul · Answer 2

The correct answer is C. This opportunity seems like a poor investment given the neutrality of money, the decline in real GDP, and the high unemployment rate.

Explanation:

In the present case, the country of Paradisia has had a growth in nominal GDP (that is, not updated by inflation or purchasing power) of 400%, but in turn has had annual inflation of 500%, with which the country's real GDP has not grown, but has instead contracted, since its currency has depreciated more than what its nominal production has grown.

In addition, it has an unemployment rate of 20%, which indicates a total lack of economic dynamism, that is, that there are not enough employers for all its inhabitants, which makes it presume an adverse economic scenario for investment.

Therefore, in view of these macroeconomic data, the proposed investment is inadvisable.