Question-11: How reducing the GDP Gap can result in increase in inflation?

Answer: Depending on the degree of GDP growth or GDP gap narrowing (Difference between potential GDP and Actual GDP), inflation may increase. Because material supplies become tighter (because of high demand) and the labor market strengthens (as labor resources already being near fully utilized), which put upward pressure on production costs.

Question-12: Why corporate profit is more important than revenue for corporate bonds?

Answer: Corporate bonds, are serviced from profits of the firm and not from the revenue figures.

Question-13: How does corporate revenue and profit are related to the GDP?

Answer: We can say that corporate profits, in the aggregate or overall, rise and fall with macro-economic activity. But corporate revenue follows the macro-economy’s path. Because in GDP, it measures the output of goods and services, which a firm can produce. Hence, you can say more GDP means more sales or revenue.

Question-14: Why bond holder are happy with the higher GDP?

Answer: Higher GDP means more sales and more revenue in general, and If a firm is producing profit with higher sale, which would generate more profit. And firm would be able to serve any due interest and debt comfortable and reduces overall default and, bondholders feel more comfortable.

Question-15: What is the possible negative effect of overall economic activity increases in a country?

Answer:  More economic activity results in the more profit for a firm but at the other hand the economy closer to its potential GDP and require more resources to produce more and required resources may not be available at low cost which results in production costs. Which leads to inflation, and material and labor costs rise faster and eats the corporate profit as well and in some cases it can reduce the profit as well from the previous results, even after having higher sales and revenue and reduces the overall debt coverage. And possibility of default can also increase.