“Governments increase the money supply too rapidly because it enables them to finance an expanding government sector without increasing taxes or borrowing from the economy’s savings”
a) What is the drawback of this policy choice?
b) What is meant by borrowing from the economy’s savings?
2. a) “Fears had been expressed that financing of the federal deficit might squeeze private borrowers out of the market.”
By what mechanism are private borrowers squeezed out of the market?
b) “The government of Greece’s debt and deficit problem is compounded by the economic recession that Greece is experiencing”
Discuss the economic problem that Greece is facing as it tries to balance its budget in a period of recession
“The earlier predictions underestimated currency in circulation and government balances at the central bank, both of which drained reserves from the banking system.”
a) Explain how these two things drain reserves from the banking system.
b) What is the main implication of draining reserves?
4. “According to Ibbotson Associates, 20 – year government bonds are on track to post annual returns of 30% by the end of 1995. That would lag only the 40% returns of 1982 and 31% returns of 1985”
In 1995 the interest rate was far below 30%. How could 1995 returns on bonds be as high as 30%?
Quantity demanded for tea has increased from 100 to 160 units with an increase in the price
of the coffee powder from Rs. 40 to Rs. 50. Calculate the cross elasticity of demand between
tea and coffee and explain the relationship between the goods.
Suppose the monthly income of an individual increases from Rs. 10,000 to Rs. 15,000
which increases his demand for clothes from 20 units to 25 units. Calculate the income
elasticity of demand and interpret the result