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Explain the meaning of the following terms as used in economics: i. Fiscal and monetary policy. (4 Marks) ii. Exchange rate and interest rate. (4 Marks) iii. Unemployment...

      

Explain the meaning of the following terms as used economics:

i. Fiscal and monetary policy. (4 Marks)

ii. Exchange rate and interest rate. (4 Marks)


iii. Unemployment rate and Okun’s law. (4 Marks)

  

Answers


Abdullahi

i. Fiscal policy refers to an economic policy which regulates the demand for and supply of money which the economy through government spending and taxation.

Monetary policy refers to an economic policy through which the Central banks or other financial authorities apply monetary policy instruments such open market operations and discount rates to regulate and manage the supply of money that is in circulation within the economy.

ii. Exchange rate refers to the amount of foreign currency that can be purchased with one domestic currency.

Interest rate refers to the amount charged for a loan by a bank or any other lender per shilling per year expressed as a percentage. It is the cost of borrowing. The interest rate minus the expected rate of inflation gives us the real rate of interest.

iii. Unemployment rate refers to the fraction of the labour force that cannot find jobs at the prevailing wage rate while Okun’s law states that a 3% increase in real GDP generates a 1% point decrease in the unemployment rate. This relationship acts as a useful guide to policy because it allows us to ask how a particular growth target will affect the unemployment rate over time.


Dullayo answered the question on August 2, 2018 at 08:51


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