Question

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A. Fill in the blank

- cyclical - countervailing            - medium of exchange

           - expansionary        -expansionary monetary policy                 - trough

            - bank rate      - required reserve ratio                                        - frictional

              - dumping                                    - contractionary monetary policy      - automatic

             - excess reserve ratio           - store of value                          - contraction

a) Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as the

b) The most direct way in which money replaces barter is through its use as a

c) A company of the Kenya has excess products that it does not want to sell into the Kenya market because it will bring down the domestic price and instead sells it in another country at below the cost of production. This situation is referred to as

d) The period of the business cycle in which real GDP is decreasing is called the

e) Workers at a steel plant are laid off because the economy is weak and the demand for       products         requiring         steel    has      is         an example   of unemployment.    

f) Declining oil prices from 2008 through the second quarter of 2010 has caused many economies to slow down. This has caused bank profits to decline, making Canadian banks vulnerable to a recession. The appropriate policy to be implemented is fiscal policy.

g) As housing prices began to drop and the economy slowed, the central bank began cutting its discount rate from 5.25% in June 2005 all the way to 0% by the end of 2006. With the economy still weak, it embarked on purchases of government securities from January 2007 until August 2012, for a total of $3.7 trillion. This is an example of

B. State the type of discretionary fiscal policy implemented or to be implemented by the government of Lota in the following events:

	Event	Type of discretionary fiscal policy
a)	The Economic Stimulus Act of 2008, in which the government of Lota attempted to boost the economy by deducting $600 or $1,200 depending on taxpayers' marital status and number of dependents. The total cost was $152 (1 mark)
b)	Declining oil prices from 2016 through the second quarter of 2018 have caused many economies to slow down. Keil was hit specifically hard in the first half of 2018, with almost one-third of its entire economy based in the energy sector. This has caused bank profits to decline, making banks in Keil vulnerable to a recession.       (1 mark)
c)	Keil has inflation rate of 17% as compared to historical average of 3%, and unemployment rate of 0.2% as compared with natural unemployment rate of 4%. (1 mark)
d)	The Keil economy is growing at a furious rate of 10% GDP per year in which this level of economic growth is unsustainable and can lead to hyperinflation. (1 mark)

Answer 1

a) Answer: Required reserve ratio

As per the central bank guidelines every bank should hold some minimum amount as reserve. The ratio at which they should hold is called required reserve ratio.

b) Answer: Medium of exchange

Barter system is replaced by money where money is used as a medium of exchange in the market.

C) Answer: Dumping

Dumping is a kind of price discrimination where a product is sold at low price in another country when compared to domestic country.

d) Answer: Contraction

In contraction phase the real GDP, wages, economic growth everything decrease in a business cycle.

e) Answer: Cyclical unemployment

Unemployment that results due to downturn in the economy is called cyclical unemployment. It depends on the up and downs in the business.

G) Answer: Expansionary monetary policy

The buying of government securities is one form of increasing money supply in market which is an expansionary monetary policy.

F) Answer: Expansionary

Expansionary fiscal policy is where the government will invest more to make the economy to grow fast. When government spending increase employment increase and consumption of goods and services also increases. Thus GDP increase.