Question

answer all parts...

1.) define and briefly explain the significance of each of the following terms:

a.) business cycle

b.) cyclical unemployment

c.) open market operation

d.) automatic fiscal policy

e.) currency depreciation

2.) suppose that the central bank sees an expansion slowing and forecasts a recession in the near future...

a.) what change in monetary policy would lessen effect of recession? what monetary policy tools would central bank use?

b.) explain effect of central bank's action on each of the following:

i.) equilibrium interest rate

ii.) equilibrium quantity of real money

iii.) aggregate demand

iv.) real GDP and price level

3.) answer a & b

a.) describe 2 tools that governments use to influence imports. explain effects of each tool on consumers, producers, and society as a whole.

b.) is a country better off with free trade or with protection from foreign competition? discuss.

Answer 1

Answer - Business cycle -they are also called trade cycle. It is the rise and fall in economic GDP that take place over time. Expansion , peak, contraction and trough are stages of business cycle. The importance of trade cycle is that government can measure economic growth by seeing the trade cycle.

Cyclical unemployment- It is an type of unemployment that take place during recession. It is a situation when aggregate demand of goods and services is not worthy to attain full employment . It represents shortage in aggregate demand.

Open market operations -Open market operation is one of the quantitative instruments of monetary policy. Open market operations deal with the sale and purchase of short term and long term government securities in the open market. In the open market, reserve bank of India sale and purchase the securities to and from the commercial banks. Government securities include treasury notes, bills, government bonds and mortgage backed securities. The major objective of open market operation is to control the supply of money by selling and purchasing of government securities. Reserve bank of India deals with the commercial banks for the sale and purchase of government securities rather than with public. Open market operations have impact upon the reserves of commercial banks, profits over government securities and cost of bank credit. Open market operations are beneficial to make the bank rate effective and to improve the stability in government securities. Open market instruments are way to bring yield over the government securities and to control the supply of money. It is helpful to control the inflation and deflation in economy.

Automatic fiscal policy- In these fluctuations in economic activity are controlled without the intervention of policy makers.

Currency depreciation- It is the situation when currency of one nation depreciated in term of another currency. It is worst because due to its foreign investors do not want to invest money in particular nation.

Answer B) Now , as the start of recession is seen by the central bank . Central bank will try to solve the problem in present to save the economy in future.

Central bank will follow expansionary policy and reduce taxes and increase spending to overcome the recession problem.

As the money supply increase , value of money decrease and interest rate falls. And aggregate demand increase was due to less interest rate , rather to keep in bank accounts , people prefer to keep money with themselves. Price level in economy increase and GDP also increases. The reason is that at less rate of interest investment will increase and increase in investment can enhance GDP of nation.