The economy of country Rumblen was hit by a banking crisis which has led to a re

Question

The economy of country Rumblen was hit by a banking crisis which has led to a recission. Jason Wallace, a real estate agent, says that the economy will recover soon because the government is taking various measures to counter the recession. According to him, the flow of credit will soon return to pre-crisis levels. His wife Anna Wallace disagrees with him. She says that the situation may not improve soon, given the substantial increase in unemployment.

Which of the following, if true, will weaken Anna's claim that the situation is not likely to improve in the short term?

A. The required reserve ratio n Rumblen has remained unchanged over the last two years.

B. Prior to the current crisis, Rumblen enjoyed a decade-long economic expansion.

C. The intrest rate on discount loans issued by Rumblen's central bank was recently decreased.

D. Inflation in the economy declined to 4 percent this year.

E. Leading economists in the country feel that the central bank should have more autonomy.

Explanation / Answer

A. If the required reserve ratio in Rumblen has remained unchanged over the last two years, then it implies that there is no monetary expansion in the direct form since when there is a recession, Central bank do uses its tools of open market operations, discount rate, Reserve requirements, to stimulate the economy.

Hence, if this is true, it will make Anna’s argument more persuasive.

B. Prior to the current crisis, Rumblen enjoyed a decade-long economic expansion. This, implies that the current period must have high unemployment and it again boosts Anna’s morale.

C. The intrest rate on discount loans issued by Rumblen's central bank was recently decreased. This is something required from central bank to increase liquidity and stimulate the economy. This would weaken Anna’s claim.

D. Inflation in the economy declined to 4 percent this year. This is the usual feature of a recessionary economy and it will bolster her argument.

E. Leading economists in the country feel that the central bank should have more autonomy. This would allow Central bank to react more quickly and without delays. So this will weaken her argument.

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