Question

Please answer questions 20-23 on the basis of the following table which shows various combinations of internal and external problems which may confront a nation.

Internal Problem External Problem

Case 1 Inflation Deficit
Case 2 Recession Deficit
Case 3 Inflation Surplus
Case 4 Recession Surplus

20. In case 1:

Question 20 options:

	domestic policy (fiscal or monetary) should be expansionary and this is conducive to resolving the nation's external problem
	domestic policy (fiscal or monetary) should be expansionary but this is in conflict with resolving the nation's external problem
	domestic policy (fiscal or monetary) should be contractionary and this is conducive to resolving the nation's external problem
	appropriate domestic policies will necessarily lead to the international transmission of inflation

21. In case 2

Question 21 options:

	domestic policy (fiscal or monetary) should be expansionary and this is conducive to resolving the nation's external problem
	domestic policy (fiscal or monetary) should be expansionary but this is in conflict with resolving the nation's external problem
	domestic policy (fiscal or monetary) should be contractionary and this is conducive to resolving the nation's external problem
	appropriate domestic policies will necessarily lead to the international transmission of recession

22. Which of the following policies is the most appropriate one for case 3?

Question 22 options:

	contractionary fiscal or monetary policy
	lowering long-run interest rates and raising the short-run interest rates
	revaluation of the domestic currency
	all of the above

23. Which of the above cases are classified as "Dilemma" situations?

Question 23 options:

	only case 1
	only case 2
	cases 1 and 2
	cases 2 and 3

Answer 1

answer: 20:

domestic policy (fiscal or monetary) should be contractionary and this is conducive to resolving the nation's external problem

because internal economy is suffering from inflation that means the money supply is high in the economy and the external problem is trade deficit means higher imports than exports so if government will adopt contractionary policy it will decrease money supply in the economy which will reduce inflation and the imports will also decrease as reduction in money supply will also reduce aggregate demand for imports

answer: 21 :

domestic policy (fiscal or monetary) should be expansionary and this is conducive to resolving the nation's external problem

because during recession the money supply is low in the economy , production and other economic activities are also very low so government increases tariffs on import to reduce imports which can increase external deficit . to bring economy out of recession government adopts expansionary policy to increase money supply in the economy which increase production and other activities the economy grows and production increases more than demand which leads to increase in exports and the deficit reduces as the inflow of capital from foreign also increases

answer: 22: the most appropriate one for case 3:

all of the above

answer: 23 cases are classified as "Dilemma" situations:

cases 1 and 2

because external problem is deficit for both situations while both inflation and recession are different economic conditions