Discuss the concepts of fiscal and monetary policy

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An economy has the following sectors: private households, government, grape producers and wine producers. The government levies a sales tax (VAT) on both grape and wine of 25%. The grape producers pay their workers $700 and sell 800 kilos of grape to the wine producers and 300 kilos of grape to final consumers. The net price for one kilo of grape is $4. The wine producers pay their workers $1000 and sell 700 bottles of wine to domestic consumers. Moreover, 250 bottles of wine are exported. The net price for one bottle of wine is $12.

1. Describe in detail the three possibilities of calculating GDP.

2. Calculate the GDP for the economy described above using each of these three possibilities.

3. Briefly discuss the concepts of fiscal and monetary policy which are the two policy channels that government uses to affect macroeconomy.

Reference no: EM133302530

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