Question

Scenario: Suppose you are Economic Adviser in Ministry of financial affairs of a country named Vermoulli. Your country is experiencing high rate of inflation. You have to prepare a report to present a solution for this situation to the Ministry of financial affairs-Vermoulli. You requested your friend (who is a Business graduate and have studied Macro Economics as one of his course) to prepare a template of the report. Your friend has prepared following template of the report, covering all key-questions related to the policies. Now you have to address those key-questions/concepts and complete the final report.

Report

Possible Solutions to Correct High Rate of Inflation

Introduction

Two policies that can correct the situation are- Fiscal policy and Monetary Policy. (Fill the following table showing at-least two difference between the two. You can tell more than two differences also.)

fiscal policy	Monetary policy

2 Fiscal Policy: There are two types of Fiscal policies: Expansionary fiscal policy and contractionary fiscal policy.

Key-Questions:

1. Explain each of the key terms in not more than one or two sentences (give formula or examples whichever is applicable): (a) Expenditure multiplier (b) transfer-payments (c) tax multiplier

2. Discuss about the impact of each policy on aggregate demand and inflation with suitable explanation and example.

3. Give a graphical explanation of the working of the policy.

Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy.

Key-Questions:

1. Explain each of the key terms in not more than one or two sentences (give formula or examples whichever is applicable): (a) Overnight rate of interest (b) Bank rate (c) Money multiplier (d) open market operations.

2. Discuss about the impact of each policy on the supply of money and inflation with suitable explanation and example.

3. Give a graphical explanation of the working of the policy Solution for the Present Situation Looking at the present situation which type of Fiscal policy would you recommend? (Expansionary/Contractionary?) Looking at the present situation which type of Monetary Policy would you recommend? (Expansionary/Contractionary?)

Limitations: Fiscal policy vs Monetary Policy Key Question:

1. What are the limitations of Fiscal policy?

2. What are the limitations of Monetary policy? 3.

3. Which policy do you think is the most effective out of the two policies (Fiscal or Monetary policy). Why do you think so?

Answer 1