Question

1.Explain whether the following statement is true or false. There is no mark for stating true or false; the mark is awarded for the explanation and the illustration only. Fiscal policy include building of new highways

2. If the government and the monetary authority think that the economy is growing too fast, what could they do to slow down the economy?

3. Discuss the effects of fiscal and monetary policy on inflation. Illustrate with good examples

4. If an economy has no money, then all transactions must be conducted through the use of

Debit cards

Barter

Credit cards

None of the above

Answer 1

1.Fiscal policy refers to some policies controlled by the govt of an economy to control the monetary condition of the country through either govt spending or tax rate change or both . Building new highways belong to the part of expansionary fiscal policy through which govt increases its pending which in turn increase the level of agg demand to boost the economy up . So it is true that building new highways belongs to fiscal policy , more accurately it belongs to expansionary fiscal policy.

2. If both the govt and monetary authority think that the economy is growing too fast, to control the economy they could take many steps like contractionary fiscal policy and contractionary monetary policy. In the part of the govt, they can decrease the govt spending or ibcrease the tax rate or both that will eventually decrease the agg demand , in the part of monetary authority they can follow some open market operation like selling all the govt bonds to lower the money supply of the economy or change in repo rate and reverse repo rate to create a contrationary effect in the money market.

3.In the case of fiscal policy, decrease in govt spending or increase in ineterst rate will lower the demand of the economy thus AD will decrease and AD curve will shift downward resulting a fall in price level and a fall in real GDP

In the case of monetary policy, if interest rate increases , the cost of borrowing increases , people tends to save more than invest that will reduce investment and consumption all together the totall demand will fall leading to a fall in price level.

4.If the economy has no money , then all the transactions should be done through barter system as money is used as a medium of exchnage which has some own value and easily dividable but when the economy has no money the only mode of exchange remains barter system.