Question

Question One: (A1, C2, D4) 1. Explain how government will implement Fiscal policy to bring the economy back to full employment, assuming the economy currently is producing at above full employment. (2.5 Marks) 2. Explain how central bank will implement monetary policy to bring the economy back to full employment, assuming the economy currently is producing at above full employment. (2.5 Marks) 3. List the five criteria for an asset to be suitable to use as money. (2.5 Marks) 4. Briefly, explain the three functions of money, which function replaces barter trade? (2.5 Marks)

Answer 1

1. To bring back the economy to the full employment level government will take fiscal policy measures to ensure the reduction in demand. so the tools are like imposing more tax and reduction in government spending. so automatically the consumption will reduce and diverted to those areas which are previously concerned by the government. So in this diagram the inflationary gap was controled by the contractionary policy measur, which push the aggregate demand curve to left and there is a decrease in price as well as quantity to attain full employment level.

2. The central bank has to take the contractionary monetary policy measure to bring back the equilibrium position. for that, it will discourage consumption as well as lending and investment. so the only effective process is to hike the interest rate so that the money supply will be less and that will impact the investment demand and it will finally lead to the shift in AD1 to AD2 and reach the equilibrium level of quantity and price.

3. The five criteria that make an asset as equal as money:

a. it should be widely accepted.

b. it should have durability.

c. it should be valuable and easy to transport

d. As a medium of exchange, it should be divisible according to the goods and services.

e. it should be standardized, means the two-unit should be identical.

4. So the functions of money which replace batter system is:

a) easy to transport. in the barter system, it is difficult to carry heavy goods for exchange.

b) It is easily divisible so it will be easy to pay according to the consumption.

c) it is standardized so the two units are identical so there is no difficulty in assign value for the goods.