IGCSE Economics Paper-2: Specimen Questions with Answers 28 - 29 of 100

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Passage

In developing countries, inflation is not purely a monetary phenomenon. Factors typically related to fiscal imbalances, driving higher money growth and exchange rate depreciation, dominate the inflation process in developing countries.

Question 28 (2 of 5 Based on Passage)

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Short Answer▾

How is inflation measured?

Explanation

For measuring inflation in a country such as U. S. , one must observe prices across the country. The change in prices seen in the local store is a very little contribution of what goes into the overall inflation in the economy. That is why sometimes people feel a disconnect between the actual prices and the inflation numbers in the economy.

  • The consumer price index (CPI) is the most used indicator of inflation, it measures the percentage change in the price of goods and services purchased or consumed by households of the members.
  • Like in Australia, the CPI is measured by the Australian Bureau of Statistics (ABS) and it is published once in a quarter. To calculate the CPI, the Australian Bureau of Statistics records the prices for different items, which are clubbed into various categories (or expenditure classes) . In every quarter, the price changes of each item are recorded in comparison with the previous quarter and the aggregate value is considered for the whole CPI basket of goods and services.

Question 29 (3 of 5 Based on Passage)

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Why government should be concerned to keep the rate of employment low?

Explanation

The Fundamental Macroeconomic Objective of the Government Is

  • Low inflation
  • Increasing the sustainable rate of economic growth
  • Full employment
  • Equilibrium in balance of payments.
Macro Economic Objectives
  • The basic objective is to have zero or very low unemployment. Whereas, in actual practice, there will always are some frictional unemployment. As people keep on looking for some new jobs.
  • According to the economists an unemployment rate of 3 % is considered as full employment. Full employment indicates the economy, is operating at its full capacity and there is no gap or deficiency in employment.

Reason for Targeting Full Employment Are

  • High unemployment involves various social and economic costs.
  • The unemployed will cause relative poverty in the economy.
  • The unemployment leads to de-motivated and unskilled employees. People experiencing long-term unemployment will find it difficult to search for employment again.
  • High unemployment increases government borrowing.
  • Unemployment also leads to social problems such as crime, vandalism, and social alienation, etc.

Therefore, there are several social benefits attached to full employment. Also, full employment has the side-effect of improving other objectives of the government. Lower unemployment will decrease the borrowing of the government and will boost economic growth.

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