Question

) Discuss factors that influence how much total spending takes place in the Zambian economy. [6 Marks] b) What determines the level of savings in Zambia. [6 Marks] c) Explain how proportional taxes automatically stabilize total spending in Zambia. [6 Marks] d) Explain the effect of an expansionary monetary policy on real physical output, employment and inflation given that economy in Zambia is operating at potential output level. [6 Marks] e) Use the aggregate demand and the 45-degree line to represent equilibrium in the goods market. Make sure to include intercept, and slope in your graph. Further assume that interest rates decrease, show the effect of decreased interest rates on equilibrium income. Explain the stage economy goes through in moving from one equilibrium to point to another. [10 marks] f) Explain what determines consumption spending in Zambia. [6 marks] [Total 40 Marks]

Answer 1

a)

• Spending in any economy is financed by the income of people in the economy or economy as a whole. Thus, real incomes is a crucial determinant of the spendings taking place in the economy.
• Another factor that influences the spendings of the economy is interest rates. If the interest rates are high, it would mean more income for lenders and thus increase their spendings. On the other hand, for borrowers high interest rates means higher payment on their loans and will thus lead to lower spendings.
• Inflation can be another factor that affects the spendings of the economy. Higher inflation means fall in disposable incomes of people leading to weaker spendings by consumers.
• Tax rates could also influence the spendings. Higher tax rates implies lower income available for the consumer to spend.
• Other determinants of spendings could be as follows - wage growth, consumer interests, saving propensity, etc.

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b) Level of savings in an economy or even Zambia is determined by various factors. Those factors are:

• Interest rates: Higher interest rates is an attraction for the people who want to save. Higher interest rates means higher return on the amount of money that is being saved. When money is deposited in the banks, people would get higher returns on their funds. There are other methods too under which people can save money or invest in to get interest in return. These kind of saving when incurred, could help in poverty alleviation in the economy.
• Knowledge: Knowledge is again another factor that determines the saving levels. If people lack knowledge about the returns they could get from saving their income in a proper manner, this could lead to their loss itself.Knowledge is one of the reason for low rate of savings in Zambia. People lack sufficient knowledge and hence do what they know with their funds.
• Other factors that afffect level of savings are - age of people, inflations, wealth levels, growth of the economy, etc.

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