PART B (10 marks): ANSWER ANY S of the 7 QUESTIONS IN PART B Arising ofilation t

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PART B (10 marks): ANSWER ANY S of the 7 QUESTIONS IN PART B Arising ofilation that is (a) fal (b) not be affected. (c) rise. ected to contrue wil anse iterest r-to Explain the reason for your answer 12 10 Unem ployment Rate Rate of Inflation a 4 2 Year 1 Year 4 As of year 4, the appropriate governmental macroeconomic policies for dealing with the economy shown by the graph would be (a) a balanced budget, and reductions in interest rates if necessary. (b) increases in government spending and no change in interest rates. (c) federal budget deficits combined with increases in interest rates. (d) reductions in government spending, higher interest rates, and possibly increases in taxes (e) reductions in both interest rates and the federal government's debt. Explain the reason for your answer. D2

Explanation / Answer

Ans for Question 6)

When Inflation rises it generally increases the prices of goods and services in an economy. An Increase Prices will lead to increase in transactions demand which makes consumer to hoard money.

Now to balance the monetary supply speculative demand should increase that is opportunity cost of holding money should increase and this to happen interest rate should increase in an economy. This is one of the stories could explain the infaltion rise increase in interest rate.

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