A2 ECONOMICS: Guess Paper-4

[Qamar Baloch]

Sir, please give a brief explanation of liquidity trap.

Liquidity trap arises at the lowest rate of interest. It is also know as critical rate of interest. At this level any increase in money supply will not have expansionary effects on the economy because the extra supplied money will be demanded by the speculators as they know that it is the minimum rate of interest and it cannot further fall. So, there is possibility of rise in interest rate in future. They take it a good opportunity and hold all the extra supplied money for future prospects. You may send me your email address on [email protected] for its graphical presentation. You may also join me on face book using the same address for routine updates regarding economics. P4 guess paper is also posted on my wall. You may be able to print that as well.

 

[hychristine]

Liquidity trap arises at the lowest rate of interest. It is also know as critical rate of interest. At this level any increase in money supply will not have expansionary effects on the economy because the extra supplied money will be demanded by the speculators as they know that it is the minimum rate of interest and it cannot further fall. So, there is possibility of rise in interest rate in future. They take it a good opportunity and hold all the extra supplied money for future prospects. You may send me your email address on [email protected] for its graphical presentation. You may also join me on face book using the same address for routine updates regarding economics. P4 guess paper is also posted on my wall. You may be able to print that as well.

Sir， could you send me a soft copy of P4 guess paper? You said you will send me ASAP but i haven't received it.....

 

[Qamar Baloch]

Sir， could you send me a soft copy of P4 guess paper? You said you will send me ASAP but i haven't received it.....

Just wait for one hour

 

[queensunflower]

Liquidity trap arises at the lowest rate of interest. It is also know as critical rate of interest. At this level any increase in money supply will not have expansionary effects on the economy because the extra supplied money will be demanded by the speculators as they know that it is the minimum rate of interest and it cannot further fall. So, there is possibility of rise in interest rate in future. They take it a good opportunity and hold all the extra supplied money for future prospects. You may send me your email address on [email protected] for its graphical presentation. You may also join me on face book using the same address for routine updates regarding economics. P4 guess paper is also posted on my wall. You may be able to print that as well.

Thank you very much Sir.

 

[Qamar Baloch]

To get guess paper with solution send your requests to qamar baloch on [email protected]. Or join me on facebook to get updates on routine basis.

 

[Qamar Baloch]

E mail has been sent to many people. If you have not yet received the same then plz reply fast to get the same.

 

[hychristine]

E mail has been sent to many people. If you have not yet received the same then plz reply fast to get the same.

i haven't i replied u.

 

[Qamar Baloch]

i haven't i replied u.

send me again your email address

 

[Qamar Baloch]

I am also going to float first question of guess for section B. All of you are expected to discuss this question with each other and if there are still any doubts then you may ask for the complete answer. I will inbox the answer to you InshaAllah.

 

[Qamar Baloch]

Its very simple question but most expected this time.

 

[Qamar Baloch]

1. In 2006 it was reported that a country’s unemployment rate had remained steady
and that its central bank, through its interest rate policy, had prevented an increase in inflation despite a sharp rise in oil prices.
(a) Explain what might cause unemployment. [12]
(b) Discuss how interest rate policy might prevent a rise in inflation. [13]

 

[Qamar Baloch]

for any discussion with me just point me out like: its for you sir qamar baloch.

 

[hychristine]

1. In 2006 it was reported that a country’s unemployment rate had remained steady
and that its central bank, through its interest rate policy, had prevented an increase in inflation despite a sharp rise in oil prices.
(a) Explain what might cause unemployment. [12]
(b) Discuss how interest rate policy might prevent a rise in inflation. [13]

i think (a) is pretty simple,just expl fictional unemployment -search,causal and seasonal unemployment; structural unemployment-technological,regional and international ; and expl cyclical unemployment .
am i right?


my brief answer to (b):
1. expl interest rate policy
2. expl link between changes in interest rate and rate of inflation
an increase in interest rate
-makes saving more attractive and borrowing less attractive---reduce aggregate spending and therefore reduce inflation
-can also decrease the prices of assets such as shares and property-⬆interest rates people buy fewer assets,decrease prices of assets. lower value of assets will decrease householder's wealth and they may not be willing to spend money. this reduce inflation
-may see money inflows from oversea as foreign investors look for higher returns in the nation with higher interest rate and attract more foreign invest. on properties and other assets, making the country local produced g&s become more expensive abroad and reduce demand
-leads to an appreciation in the value of currency and this reduces the import prices of g&s as the imports goods become cheaper in terms of country's currency
-probably reduce the confidence and expectation for the future biz performance, which may further reduce the consumption and investment in the macro economy.

in general, govt. can ⬆the interest rate to ⬇the AD by shifting the AD to left and then further reduce the price level of g&s.(draw a diagram showing the effect of an increase in interest rate)


3. however, according to the case that there is a sharp rise in oil price, the economy may suffer from cost push inflation. if the inflation is caused by an increase on oil price, the interest rate policy may be less effective to control the cost-push inflation. to control cost-push inflation, govt. might reduce the tariff on imported oil and increase the domestic currency exchange rate if floating exchange rate system is applicable.

in conclusion, the effectiveness of such policy would depend on the interest elasticity of demand

Sir qamar baloch, which level can i get? ;P

 

[Qamar Baloch]

i think (a) is pretty simple,just expl fictional unemployment -search,causal and seasonal unemployment; structural unemployment-technological,regional and international ; and expl cyclical unemployment .
am i right?


my brief answer to (b):
1. expl interest rate policy
2. expl link between changes in interest rate and rate of inflation
an increase in interest rate
-makes saving more attractive and borrowing less attractive---reduce aggregate spending and therefore reduce inflation
-can also decrease the prices of assets such as shares and property-⬆interest rates people buy fewer assets,decrease prices of assets. lower value of assets will decrease householder's wealth and they may not be willing to spend money. this reduce inflation
-may see money inflows from oversea as foreign investors look for higher returns in the nation with higher interest rate and attract more foreign invest. on properties and other assets, making the country local produced g&s become more expensive abroad and reduce demand
-leads to an appreciation in the value of currency and this reduces the import prices of g&s as the imports goods become cheaper in terms of country's currency
-probably reduce the confidence and expectation for the future biz performance, which may further reduce the consumption and investment in the macro economy.

in general, govt. can ⬆the interest rate to ⬇the AD by shifting the AD to left and then further reduce the price level of g&s.(draw a diagram showing the effect of an increase in interest rate)


3. however, according to the case that there is a sharp rise in oil price, the economy may suffer from cost push inflation. if the inflation is caused by an increase on oil price, the interest rate policy may be less effective to control the cost-push inflation. to control cost-push inflation, govt. might reduce the tariff on imported oil and increase the domestic currency exchange rate if floating exchange rate system is applicable.

in conclusion, the effectiveness of such policy would depend on the interest elasticity of demand

Sir qamar baloch, which level can i get? ;P

nice attempt. keep it up!

 

[Qamar Baloch]

I am expecting the same from attempts others as hychristine is doing. Well done dear you are really amazing. Concepts are very goo and can easily link them.

 

[mariam_anwar]

Policies apart from interest rate to control, inflation include;
1. Increase in direct taxes (i.e income tax, corporate tax and inheritance tax etc. High direct tax decreases the purchasing power of people and they tend to spend less. In this way aggregate demand comes under control and price level will reduce. You may draw equilibrium graph to show the initial price level in the country then shift aggregate demand curve to the left you can clearly see that price level has decreased.
2. Open market operations: This is the activity of the government to sell securities in the market by offering very good rate of returne. Paople buy these securities and certificates to earn high return in future. Most of the time these securities are of gilt edged nature and government pays back mony to the security holders after 20 to 30 years. It also affects the purchasing power of the people and again aggregate demand )AD) falls and price level comes under control.
3. Changes in reserve ratio, 4. Changes in marginal requirements, moral persuasion, direct action and publicity etc are the effective ways to control inflation.

All these are tools of monetory policy ??

 

[mariam_anwar]

Sir thankyou for eco guess data response

 

[Qamar Baloch]

All these are tools of monetory policy ??

yes dear these are.

 

[Qamar Baloch]

Sir thankyou for eco guess data response

welcome dear.

 

[Qamar Baloch]

welcome dear.

I will try my level best to help you out up to the extent, I have the knowledge and experience.