Question

QUESTION 9 An automatic stabilizer is O a tool that helps reduce the effect of a fall in demand for a firm's product. O a tool that ensures imports always equal exports in an economy a feature of the economy that reduces its sensitivity to shocks. O a feature of the economy that reduces its dependence on international trade.

Answer 1

Question No:9

Automatic stabilizer is a tool which stabilizes the economy from shock sensitivity. Sensitivity to shock means any kind of variation happening in the economic variables which will impact the results of the economy. The outcomes include inflation, unemployment etc. So, automatic stabilizer reduces the effect of unemployment occurring during a recession period. Also, during an expansionary period, it controls the inflation speed.

Federal bank follows a progressive tax system. It is considered as an automatic stabilizer because it decreases the limit of adverse variations of economy with the way of boosting the total demand.

Hence, option (c) is the correct answer.

Question No:10

When treasury securities have been purchased by Fed, it means that they want to rise the money supply in the economy. This increases the aggregate demand.

When reserve requirements are reduced by Fed reserve, cash hold as bank reserves will also be reduced. This improves the lending of more loans to the customers. Thus, money supply in the economy will increase and hence, aggregate demand will also increase.

Tax reduction will facilitate more income. This will increase the money supply and thus aggregate demand.

But,the discount rate (interest rate charged by central bank to other banks) is reduced for reducing the supply of money in the economy and to decrease the demand.

Hence, option (a) is the correct answer.

Question No:11

M1 is a component of the money supply which is easy to make liquid, which means easy to convert into cash. It refers to money supply which consists of coin, currency, traveler's checks, withdrawal accounts, checkable deposits and demand. deposits. It does not consists of bonds, savings account etc.

Next easy liquidity components of money supply will be included in M2 and those which are very hard for make liquid will be included in M3. Savings account is not such easy to convert into cash. Hence, it will be included in M2.

Hence, option (a) is the correct answer.

Question No:12

An adverse shock of supply is a situation where costs of the commodities will rise and manufacturing of the commodities will be disturbed unexpectedly. Inflation will be higher. When production reduces, output will also decreases. Level of prices will rise and GDP level will be reduced.

Hence, option (c) is the correct answer.

Question No:13

Checking deposits are basically bank deposits made in any of the checking accounts, savings accounts or money market accounts. The convenience of this account is that the depositors can write down checks and withdraw their money from the bank. They are very liquid assets to the depositors, but at the same time, a liability to the banks. As they are very liquid they are include din the M1 category of money supply. It is not a commodity money either as it do not have value in itself.

Hence, option (b) is the correct answer.