Question 1 (Inflation)
Mrs. Johnson is a teacher planning to give her students an overview of macroeconomics and
the tools governments use to manage the economy. She explains that the government often
has to make difficult choices when it comes to spending and taxation, and these decisions
directly affect things like employment and inflation.
(a) Imagine you are explaining macroeconomics to Mrs. Johnson’s students. Define the term
and describe how it differs from microeconomics.
(b) Mrs. Johnson says the government sometimes uses "fiscal policy" to manage demand in
the economy. Explain to her students the difference between expansionary (or reflationary)
and contractionary (or deflationary) fiscal policies, and how each one affects aggregate
demand in the economy.
(c) Mrs. Johnson then introduces the concept of monetary policy and how governments use it
to influence consumer behaviour. Describe two expansionary monetary policy tools the
government might use, and explain how each affects consumers' willingness to spend or
borrow.
(d) Finally, Mrs. Johnson wants her students to understand the impact of inflation. Explain
two potential consequences of inflation on the economy and provide a specific example of
each.
Question 2 (Inflation)
The government of a small Caribbean island has noticed that prices have been steadily rising
over the past year, affecting both businesses and citizens. The Minister of Finance wants to
educate the public on inflation and its causes.
(a) Imagine you are advising the Minister. Define inflation in simple terms for the public and
explain how it is typically measured.
(b) The Minister wants to explain why prices are rising. Identify and explain two causes of
inflation, giving an example of each.
(c) As a Caribbean nation that relies heavily on imported goods, the island is especially
vulnerable to imported inflation. Explain to the public how imported inflation could increase
local prices and how it can contribute to cost-push inflation.
(d) The Minister wants to highlight how inflation affects different groups in the economy.
Describe how inflation impacts:
- Fixed income earners
- Borrowers
Question 1 (Recession)
The Caribbean nation of Isla Verde is experiencing a recession. The government has reported
a steady decline in the country’s GDP over the past few months, and unemployment rates
have surged as businesses cut back on production. The Minister of Finance has warned that
this situation may worsen if actions are not taken promptly.
(a) Define recession and explain how it differs from a depression.
(b) The government of Isla Verde is worried about the effects of this recession on the
economy. Describe two potential consequences of the recession on Isla Verde’s citizens and
businesses.
(c) The government of Isla Verde is considering implementing reflationary fiscal policy to
address the recession. Explain how two fiscal policy measures can stimulate the economy and
reduce unemployment in Isla Verde.
Question 2 (Recession)
Mr. Thompson, an entrepreneur in the electronics sector, has noticed that consumer demand
for his products has decreased significantly. He fears that this trend may continue and has
postponed his expansion plans, even considering layoffs. Around the same time, the
government announced a plan to lower interest rates to help counter the economic slowdown.
(a) Using Mr. Thompson's situation as an example, explain how pessimism among
entrepreneurs can lead to a recession.
(b) The government has proposed reflationary monetary policy to combat the economic
slowdown. Identify two monetary policy measures the government could implement and
explain how each could help businesses like Mr. Thompson’s recover.
(c) Describe how an increase in unemployment, as feared by Mr. Thompson, could further
affect aggregate demand and contribute to the recession.
