Question

Below are pairs of economic outcomes in (a)-(g). For each pair, provide 1 Determinant Change or 1 Monetary Policy stance (Expan or Contr) or 1 Fiscal Policy stance (Expan or Contr) that could cause the pair of outcomes under the assumptions of: wages are rigid (expect for (g)); secondary effects are smaller than initial effects; international financial account responses are stronger than international current account responses; and default concerns are low. Determinant changes / policies may be repeated. a. Unemployment rises, Real GDP rises b. Real GDP falls, Flexible Exchange Rate depreciates c. Real Interest Rate falls, Unemployment falls d. Inflation falls, Budget Balance moves toward surplus e. Real GDP rises, Official International Reserves rise. f. Inflation rises, Flexible Exchange depreciates g. Wage Rate falls, Interest Rates rise h. Choose 1 of your (a) – (g) answers and provide a brief analytical chronology of how the determinant/policy change leads to the 2 outcome changes.

Answer 1

f. Inflation rises, Flexible exchange rate depreciates

UNDERLYING CONCEPTS:-

• INFLATION- Rise in the General price level in the Economy.
• FLEXIBLE EXCHANGE RATE- Rate system in which FOREX valuation occurs according to the market forces of Demand Supply.
• MONETARY POLICY- Policies of the Central Bank of the country.
• FISCAL POLICY- Policies of the General/ Central Government.

According to the question

Inflation is rising in the Economy now the structural policy reforms for such economic variable will be as;

1. MONETARY REFORMS- The Central Bank's numerous policy could result in causing inflationary situation in the economy, like :-

• Fall in the Valuation of Bank reserves.
• Fall in Bank Rate.
• Fall in Repo Rate
• Purchasing Government Securities from the Economy.
• Fall in the Reverse Repo.
• Setting lower Margins
• Lowering the Marginal Requirements over Securities.

2. FISCAL REFORMS- The Central Government"s numerous policy could result in creating such conditions, like :-

• Reduction in the value of Direct Taxes.
• Reduction in the value of Indirect Taxes.
• Excessive Budgetary Expenditure.
• Deficit Financing.
• Borrowings from General Public/ Open Market

Flexible Exchange rate Depriciates , it means the rate at which the currency of other country was exchanged is depriciating.

1. MONETARY REFORMS- The Central Bank's numerous policy could result in causing depriciation of flexible exchange rate in the economy, like :-

• Insufficient reserves of Forex
• Higher Interest rates in domestic Economy.
• Low Bank Reserve Requirements.
• Extensive Credit policy.

2. FISCAL REFORMS- The Central Government"s numerous policy could result in creating such conditions, like :-

• Fall in Indirect Taxes
• Fall in Direct Taxes
• More Expenditure in the Economy,

The Central Bank and Government will follow expansion of the base country's Income and Currency for corresponding to such situation in the Economy.