Section A
Question answers,
1. False
2. False
3. True
4. True
5. True
6. True
7. False
8. True
9. False
10. True
Section B
Question 1
a) Regressive tax – This is a tax applied uniformly, taking a large percentage of income
from low-income earners than from higher-income earners.
b) Minimum cash reserve ratio – This is a specified minimum fraction of the total deposits
of customers which commercial banks have to hole as reserves either cash or as deposits
with central bank.
c) Monetary policy – This is how central bank or other agencies govern the supply of
money and interest rates in an economy in order to influence output, employment and
prices.
d) Comparative advantage – This is the ability of an individual or group to carry out a
particular economic activity more efficiently than another activity.
e) Incidence of a tax – This is the extent to which an individual or organization suffers from
the imposition of a tax.
Question 2
Liquidity preference by definition is simply the demand for money.
Keynes’s theory for liquidity preference states that the demand for money is not to borrow
money but to desire to remain liquid, the interest rate is the price for money.
As the interest rates increase the demand for money reduces.
As the interest rates reduce the demand for money increases.
The liquidity preference curve does not touch the x or y axis
The liquidity preference curve makes a horizontal line called the liquidity trap
Question 3
Protectionism in international trade is defined as the policy that protects domestic industries from
unfair competition from foreign industries.
The instruments or tools used in protectionism include:
Tariffs on imported goods – This immidiatly rises the price of imported goods. Imported
goods become less competitive when compared to local goods, this method works best
for countries with lots of imports.
Subsidies – Government frequently subsidies local industries to help them compete in
the global market. Subsidies come in form of tax credit and direct payments. The most
commonly used are farm subsidies that allow producers to lower the price of local goods
and services.
Quotas on imported goods – This method is more effective than the first two. No matter
how low a country sets the price through subsidies it cannot ship more goods.
Currency manipulation – It is a deliberate attempt by a country to lower its currency
value. This would make its exports cheaper and more competitive. This method can
result in retaliation and start a currency war.
Question 4
Privatization – The transfer of ownership property or business from the government to
the private sector.
Nationalization – This is when the government takes control of a company or industry,
which generally occurs without compensation for the loss of the net worth of seized
assets and potential income.
Monetary policy – This is how central bank or other agencies govern the supply of
money and interest rates in an economy in order to influence output, employment and
prices.
Balance of payments – This is a record of all economic transactions between the
residents of the country and the rest of the world in a particular period of time.
Exchange rate – This is the buying and selling of currency of one country by another.
Question 5
Business cycles are fluctuations in economic activity that an economy experiences over a
period of time.
Business cycles are identified as having four distinct phases these are;
Expansion – This is characterized by increasing employment, economic growth and
upward pressure on prices.
Peak – This is the highest point of the business cycle, when the economy is producing
at maximum allowable output employment is at or above full employment and
inflationary pressures on prices are evident.
Contraction – This is where growth slows, employment declines and pricing pressures
subside.
Trough – This is the point which the economy hits the bottom from which the phase of
expansion and construction will emerge.
The two policies that the government uses to control business cycles include;
Monetary policy – Whatever may be the cause of the short business cycle it is always
aggravated by the monetary factors these are:
Monetary inflation, by leading to higher profits and an optimistic. Outlook, strengthens
the upswings of the cycle.
Monetary deflation, on the contrary, by leading to lower prices, lower profits and
pessimistic outlook re-in-forces the down swing of the cycle. Some steps should be
taken to check and control the monetary factors which aggravate business fluctuations
caused by the business cycle. For this, the government may evolve a suitable monetary
policy to deal with the situation.
Fiscal policy – Monetary policy taken alone may not suffice to check cycle business
fluctuations. It is therefore suggested that monetary policy should be properly
integrated with a suitable fiscal policy to achieve the desirable results.
Government activity of late, has expanded so much that the government is now in a
position to exercise a very great influence on the total volume of output in a country.