Question

a) What is inflation rate targeting?

b) Differentiate between a fixed and flexible exchange rate.

(ii) Determine the effects if monetary policy is used to stabilize the economy

(iii) Determine the effects if fiscal policy is used to stabilize the economy.

Answer 1

Ans:

a) Inflation rate targeting is a central bank's strategy for specifying an inflation rate as a goal and adjusting monetary policy to achieve the rate.

b) Fixed exchange rate and Flexible exchange rate

Fixed exchange rate is a rate which is maintained and controlled by the central government whereas flexible exchange rate is a rate which is determined by the market forces that's demand and supply forces.

ii) Monetary policy imparts the money supply in an economy which influences the inflation rate and interest rate.

iii) Fiscal policy affects the aggregate demand through changes in government expenditure and taxation. Those factors influence the employment and household incomeincome, which then impact on consumer spending and investment.