Economics 3
ECO 362S
October test
14 October 2022
Lungelo Nxumalo
220000492
Section A
Question 1
1. D
2. B
3. D
4. A
5. B
6. B
7. D
8. D
9. A
10. E.
Section B
Question 2.
Demand-pull inflation
Demand-pull inflation occurs when demand increases and exceeds the supply
of goods available (“too much money chasing few goods”).
Graphic illustration of Demand-pull inflation.
Demand-pull inflation occurs when the aggregate demand for goods and services increases.
This is illustrated by the rightward shifts of the AD curve from AD1 to AD2, AD3 and AD4.
As long as there is still excess capacity in the economy, the increases in the price level will be
accompanied by increases in production and income.
However, when full employment is reached, further shifts in the AD curve (from AD3 to AD4)
lead to price increases only.
QUESTION 3
Economic Effects of inflation
Inflation leads to low economic growth and high unemployment.
Inflation leads to balance of payment problems.
Inflation increases the cost of export and import competing industries.
Inflation results to the depreciation of a country’s currency.
Inflation lowers the value of money (Purchasing power).
Inflation raises interest rates.
Question 4
Essential features of inflation targeting as a monetary policy.
1. The announcement of quantitative targets.
This is the public announcement of quantitative inflation targets.
The reserve bank announces the rate of inflation and its plans to combat it.
2. The primacy of price stability as the objective of monetary policy.
The Government’s primary goal is to achieve stable prices.
Stable prices/price stability is another way of combating inflation.
3. A broad-based pragmatic approach to the analysis of inflation.
A wide range of variables and not just monetary aggregates or the exchange rate
are used to decide on the appropriate setting of the policy instruments.
Repo rate is an example of the policy instruments.
4. Transparency.
The Reserve bank should regularly inform the public and markets about its plans,
objectives, and decisions.
Informing the public and markets will make things easier for the central banks as
the public and markets will be aware and know how to plan and decide.
5. Accountability
The reserve bank should be held accountable to the parliament and the public for
attaining its inflation objectives.
The reserve bank should also comply and account for their plans, objectives, and
decisions.
