Question

True or False brief explanation 1- To stabilize inflation, the Central Bank will gradually reduce the policy rate when the inflation rate is increasing. 2- Higher public spending can help to reduce unemployment in the medium run but it will depress private savings and investment.

Answer 1

1) false

, bcoz as interest rates rise, people are able to borrow less money, bcoz interest payment is higher, so aggregate spending falls, as people keep less money with themselves, so demand falls in Economy, hence general price level falls , hence inflation is controlled.

So to control rising inflation, interest rate or policy rate should be increased rather than decrease.

2) True

as G increase, expansionary fiscal policy, hence aggregate demand increase, both output & Employment increase, hence drop in unemployment rate.

But as fiscal expansion casues rise in interest rate, so investment hurts , crowding out of private investment occurs.

As G rise, budget deficit rise, so govt has to raise taxes, thus private savings fall