ECONOMICS

Date : 13 June 2024

Period : 8H30-11H30

END OF TERM III EXAMINATION

QUESTION PAPER

GRADE: SENIOR FIVE (S5)

LEVEL: ADVANCED
OPTION: MEG & MCE

DURATION: 3 HOURS

MARKS:
…... /100 …... /70
CAMIS:

INSTRUCTIONS
1) Write your names and your number on your answer booklet.
2) Do not open this question paper until yu are told to do so.
3) This paper consist of two sectiona: section A and B.

- SECRON A: Attempt all questions (55marks)

- SECTION B: Attempt any Three questions (45marks)
- Give explanatons and relavant examples where necessary.
Use only a blue or a black pen.

1
SECTION A : ALL QUESTIONS ARE COMPULSORY. (55MARKS)

1) Choose the best answers. (5 marks)

i. Which of the following best describes a characteristic of perfect competition

market?
a) Many buyers and sellers
b) Homogeneous products
c) Significant barriers to entry
d) Price determined solely by individual sellers

ii. What is the primary downside of a monopoly from a societal perspective?

a) Limited innovation
b) Increased consumer choice
c) Lower prices
d) Greater market efficiency

iii. What is a key feature of the long-run equilibrium in a perfectly competitive

market?
a) Firms earn economic profit
b) Price exceeds average total cost
c) Firms operate at minimum efficient scale
d) Excess capacity exists in the industry

iv. What happens to a firm in the long run if it is earning economic profit in a
perfectly competitive market?
a) It exits the market
b) It increases production
c) It decreases output to maintain profit levels
d) It attracts new competitors, reducing profit to zero

v. Which statement best reflects the role of individual firms in a perfectly

competitive market?
a) Firms have significant control over market prices
b) Firms can differentiate their products to gain market power
b) Firms are price takers, accepting the market price as given.
d) Firms can influence market demand through advertising

2
 2) Choose the appropriate words or concepts to fill in the blanks to complete the
given statements. (4 marks)
Words : proportional tax; Tax mitigation, disposable income; Taxation,
i) In Rwanda the body responsible for the process of ……………. is called
‘’Rwanda Revenue Authority ‘’.
ii) Tax avoidance also called ……………………. refers to the exploitation of
the loopholes by the tax payer to pay less or no tax at all.
iii) The taxes levied on individuals’ or companies’ incomes is of
the …………………………type.
iv) The tax system where the tax rate is the same for all income
levels is called ……………………………………
3) Match the financial institution in the left column with its corresponding
description/function in the right column. (5 marks)

Financial institutions Description/function

i) Commercial bank a) Regulates the money supply and oversees
monetary policy.
ii) Investment bank b) Facilitates the buying and selling of securities
in financial markets.
iii) Central bank c) Accepts deposits from customers and provides
loans.
iv) Stock exchange d) Provides financial services to consumers and
businesses.
v) Financial company e) Acts as an intermediary in securities offerings

4) Choose the best answer. (5 marks)

i. Which one of the indece can be best used to measure the rate of inflation in
Rwanda ?

a) Producer Price Index (PPI)

b) Retail Price Index (RPI)

c) Consumer Price Index (CPI)

d) Wholesale Price Index (WPI)

3
ii. The Consumer Price Index (CPI) is often used to adjust:

a) Corporate profits

b) Social security benefits

c) Stock market indices

d) Interest rates

iii. Which index is used to adjust nominal GDP for changes in price level?

a) Consumer Price Index (CPI)

b) Producer Price Index (PPI)

c) Gross Domestic Product (GDP) Deflator

d) Retail Price Index (RPI)

iv. When calculating a price index, what is typically used as the base period?

a) The most recent period

b) The period with the highest prices

c) The period with the lowest prices

d) A specific historical period for comparison.

v. For which purpose is a basic year used while calculating price index ?

a) Current year comparison

b) Historical analysis

c) Future predictions

d) Currency exchange

5) A developing country P has a high rate of population. The country wants to

take different measures to control the population growth without the violation
of human rights.

4
Answer by True or False if the statement indicates the best mesure that can be
taken to control population growth. (4 marks)
i. Undertake the population census in order to know the total number of the
population, its structure and condition of life in order to plan for
economic development accordingly.
ii. The country can introduce sex and reproductive health education in school
curriculum and oblige abolition for each unwanted pregnancy.
iii. Family planning is an obligation for all couples and the legalized age of
marriage at 35 years for both men and women.
iv. Introduction of massive sensitization to the public by the government and
non- government organizations about the dangers of high population
growth rate and consequences of many children.
6) What do you understand by :

a) Fiat money. (3 marks)

b) Quasi money. (2 marks)

7) Complete the statements below with the appropriate terms regarding labour
and wage unit.

a) The minimum wage is the wage set above the equilibrium wage while …………. is
the wage set below the equilibrium wage. (1mark)
b) A wage is a reward to labour as a factor of production for services rendered while a
…………………. is a fixed reward to labour and it does not change because of time
or pieces of work done. (1mark)
c) A nonspecific labour is labour that can be transferred from one use to another
while a ………………………. is labour that cannot be changed from one production
activity to another. (1mark).
d) Demand for labour refers to the number of labourers needed by an employer at a
given wage in a given period of time while the ………………………. for labour refers to
the number of hours an individual is willing to offer for work per day, week, month, or
year. (1mark)
e) Wage freeze is the deliberate government policy of maintaining wages at
their current levels so as to control inflation while …………………………….. is
the voluntary restriction of wage increase by workers in order to control
inflation. (1mark)
f) Labour efficiency is the ease which labour can produce good quality
and quantity output in the shortest time possible while
……………………………is output per unit of labour. (1mark)

5
8) Use hypothetical data showing the level of national income of the country X
in closed economy with government intervention and choose the best
answers. (5 Marks)

C=50+0.8Yd

T=20%

I=100

G= 30

Where C = consumption expenditure

Yd=Disposable income
I =investment expenditure
G= Government expenditure

i. Find National income equilibrium.

a) 200

b) 600

c) 500

d) 400

ii. What is the value of tax ?

a) 50

b) 100

c) 150

d) 200

iii. What is the value of disposable income ?

a) 200

b) 300

c) 400

d) 500

6
iv. What is the value of consumption ?

a) 250

b) 170

c) 350

d) 370

v. What is the value of saving ?

a) 50

b) 130

c) 150
d) 200
9) How do the following concepts affect consumption?

a) General Price level. (2marks)

b) Disposable income. (2marks)
c) Population size. (2marks)
10) Classify the following debts in their respective types represented in the
table. : internal debt; funded debt; dead weight debt; external debt; self-
liquidating debt. (5 marks)

Types of debt
According to how a debt is According to the method According to the sources
going to be paid. of payment. of borrowing.

11) Chose the best answer. (5 marks)

i) How does monopoly firm determine the price of its product?

a) Based on market demand and supply.

b) Through collusion with other firms.

c) By maximizing profit at the point where marginal revenue equals marginal

cost.

d) By following government regulations.

7
ii) How might the government regulate a monopoly to prevent abuse of market
power?
a) By enforcing price floors

b) By imposing low taxes on the firm

c) By subsidizing the firm

d) Through antitrust laws and regulations

iii) How does consumer surplus typically compare between a monopoly and a
perfectly competitive market?
a) Higher in a monopoly

b) Lower in a monopoly

c) Equal in both

d) Unpredictable

iv) What is a possible consequence of government intervention to break up a

monopoly?

a) Increased market efficiency

b) Decreased competition

c) Lower prices for consumers

d) Higher barriers to entry

v) What is the characteristic feature of a monopoly market structure?

a) Many buyers and sellers

b) Identical products

c) Single seller with significant market power

d) Perfect information

8
 SECTION B : ATTEMPT OPNLY THREE QUESTIONS OF YOUR CHOICE /45
MARKS.
12) a) What is meant by the term “fiscal policy” ? (1mark)

b) Analyse the role of fiscal policy in regulating the level of economic activities

in your country. (14 marks)

13) Evaluate the effects economic depression on countries’ economy.

(15marks)
14) Evaluate the role of the central Bank in the development of a country’s
economy. (15 marks)
15) The Chief Economist at The Ministry of Finance and Economic Planning
said: “The Government of Rwanda is deeply aware that high inflation is
imposing significant hardship, damaging budgets and decreasing what people
buy”.

a) Define the term inflation. (1 mark)

b) Distinguish between stagflation and reflation. (4 marks)

c) Suppose you are appointed as a Senior Adviser to the Minister of Finance and
Economic Planning, elaborate policy measures to restore price stability to
Rwanda’s economy. (10marks)

16) In many developing countries, disparities in living standards between rural and
urban areas are large. Many governments around the world actively attempt
to discourage internal population movements from rural to urban areas.

a. What is meant by the term “rural urban migration”? (1mark)

b. Explain negative effects of rural-urban migration to the development of your

country. (7marks)

c. Propose policy measures to control rural –urban migration in your country.

(7marks)

9
ECONOMICS
Date: 13 June 2024
Period: 8H30-11H30

END OF TERM III EXAMINATION

MARKING GUIDE

GRADE: SENIOR FIVE (S5)

LEVEL: ADVANCED
OPTION: MEG & MCE

DURATION: 3 HOURS

MARKS:
…... /100 …... /70
CAMIS:

INSTRUCTIONS
1) Write your names and your number on your answer booklet.
2) Do not open this question paper until yu are told to do so.
3) This paper consist of two sectiona: section A and B.

- SECRON A: Attempt all questions (55marks)

- SECTION B: Attempt any Three questions (45marks)
- Give explanatons and relavant examples where necessary.
Use only a blue or a black pen.

10
1)
i.=b) Homogeneous products.
ii. =a) Limited innovation.

iii.= c) Firms operate at minimum efficient scale.

iv.=d) It attracts new competitors, reducing profit to zero.
v.=c) Firms are price takers, accepting the market price as given.

(1mark x5=5marks)
2) (1mark x4= 4marks)

i)= Taxation
ii) Tax mitigation
iii) Direct tax
iv) Proportional tax.
3) (1mark X5=5marks)

Financial institutions Description/function

Commercial bank c) Accepts deposits from customers and provides loans.

Investment bank e) Acts as an intermediary in securities offerings

Central bank a) Regulates the money supply and oversees monetary policy.
Stock exchange b) Facilitates the buying and selling of securities in financial
market.
Financial company c) Provides financial services to consumers and businesses.

4) (1mark X5= 5 marks)

i. = c) Consumer price index. (CPI).
ii. = b) Social security benefits

iii. = c) Gross Domestic Product (GDP) Deflator

iv = d) A specific historical period for comparison.

v= a) Current year comparison

11
5) (1mark x5=5marks)
i) Undertake the population census in order to know the total number of the
population, its structure and condition of life in order to plan for economic
development accordingly. True
ii) The country can introduce sex and reproductive health education in school
curriculum and oblige abolition for each unwanted pregnancy. False
iii) Family planning is an obligation for all couples and the legalised age of marriage at
35 years for both men and women. False
iv) Introduction of massive sensitisation to the public by the government and non-
government organisation about the dangers of high population growth rate and
consequences of many children. True

6) a) Fiat money: This is any paper money that is not backed by any commodity, but it
is accepted as legal tender. (3 marks)
b) Quasi money: This is also called near money. A liquid asset that cannot be used as a
medium of exchange itself, but which can be easily and cheaply converted into money.
(2 marks)
7) Complete the statements below with the appropriate terms regarding labour and wage
unit.
a) The minimum wage is the wage set above the equilibrium wage while maximum wage is the
wage set below the equilibrium wage. (2 marks)
b) A wage is a reward to labour as a factor of production for services rendered while a salary is a
fixed reward to labour and it does not change because of time or pieces of work done.
(1 mark)
c) A nonspecific labour is labour that can be transferred from one use to another while a
specific labour is labour that cannot be changed from one production activity to another.
(1 mark).
d) Demand for labour refers to the number of labourers needed by an employer at a given wage in
a given period of time while the supply of labour refers to the number of hours an individual
is willing to offer for work per day, week, month, or year. (1 mark)
e) Wage freeze is the deliberate government policy of maintaining wages at their current
levels so as to control inflation while wage restraint is the voluntary restriction of
wage increase by workers in order to control inflation. (1mark)
f) Labour efficiency is the ease which labour can produce good quality and quantity
output in the shortest time possible while labour productivity is output per unit of
labour.
(1mark)

12
8) (1mark x5= 5marks)
i. c) 500
ii. b) 100
iii. c) 400
iv. d) 370
v. b)130

9) How do the Following affect consumption ?

- General Price level : The higher the price, the lower the demand and
consumption ; and the lower the price the higher the demand and
consumption. (2marks)
- Disposable income: The higher the disposable income, the higher the consumption;
and the lower the disposable income the lower the consumption. (2marks)
- Population size: The bigger the population size the higher the consumption;
and the smaller the population the lower the consumption. (2marks)

10) (1mark x5= 5marks)

Types of debt
According to how a debt is According to the . According to the sources of
going to be used. method of payment borrowing

Dead weight debt Funded debt. Internal debt

Self-liquidating date. External debt

11) 1mark x5=5marks

i.= c) By maximizing profit at the point where marginal revenue equals marginal cost
ii. d) = Through antitrust laws and regulations

iii.= b) Lower in a monopoly

iii.= b) Lower in a monopoly

iv.= a) Increased market efficiency

v. = c) Single seller with significant market power

13
SECTION B:

12) a. Fiscal policy refers to the deliberate use of taxation, borrowing and
government expenditure to regulate the level of economic activities or stabilise
development (1mark)

b. The role of fiscal policy in regulating the level of economic activities in an

economy: (1mark x7=7marks)

- Fiscal policy can influence economic activity through government spending.

Increased government spending on infrastructure, education, healthcare, and other
sectors can stimulate economic growth by creating demand for goods and services.

Tax policy is a significant tool in fiscal policy. By adjusting tax rates, the government
can influence disposable income, consumption, and investment decisions of households
and businesses. For instance, reducing taxes can boost consumer spending and
business investment, thus stimulating economic activity.
- Fiscal policy can affect economic activity through the management of budget
deficits or surpluses. During economic downturns, governments may intentionally run
deficits to stimulate demand and support economic recovery. Conversely, during periods
of economic expansion, governments may aim for budget surpluses to prevent overheating
and inflation.

- Fiscal policy involves managing public debt levels. High levels of public debt can
crowd out private investment, leading to higher interest rates and reduced economic
activity. Therefore, fiscal policy aims to ensure sustainable levels of public debt to maintain
economic stability.

- Fiscal policy can be used to redistribute income and wealth through progressive
taxation and social welfare programs. By redistributing income from higher-income
individuals to lower-income individuals, fiscal policy can help reduce inequality and
stimulate aggregate demand, thus affecting economic activity.

- Fiscal policy includes automatic stabilizers such as unemployment benefits and

progressive taxation, which automatically adjust during economic downturns or upturns.
These stabilizers help stabilize disposable income and aggregate demand, cushioning the
economy from extreme fluctuations.

- Fiscal policy involves strategic investments in infrastructure projects such as

transportation, communication, and energy systems. These investments not only create
jobs and stimulate economic activity in the short term but also enhance productivity and
competitiveness in the long run.

14
- Fiscal policy can support human capital development through investments in
education and training programs. A skilled workforce improves productivity and
innovation, leading to higher economic growth and competitiveness.

- Governments may use fiscal policy to support specific industries or sectors deemed
vital for economic growth or national security. This support can be in the form of subsidies,
tax incentives, or targeted investment programs.

- Fiscal policy is instrumental in implementing counter-cyclical measures to mitigate the

impact of economic cycles.

- During recessions, governments may increase spending and reduce taxes to boost
demand and stimulate economic activity. Conversely, during periods of overheating or
inflationary pressures, fiscal policy may focus on austerity measures to cool down the
economy.

However, fiscal policies can hamper economic activities in the following ways:
(1mark x7=7marks)

- If much of the extra money from fiscal actions (such as government spending or tax
cuts) goes to people who are more likely to save their money rather than spend it, then the
overall effect on the economy will be contractionary. This is because when people save
more of their income, they are not putting as much money back into the economy through
consumption, which can slow down economic growth.

- In anti-depression fiscal policy, increasing public spending and reducing taxes are
crucial components. However, if the changes in injections or withdrawals from the economy
are not in line with what is needed, the system may not move in the intended direction,
leading to increased instability in the economy.

- Crowding out private investment: Increased government spending can lead to Inflation:
If fiscal policy is too expansionary, it can lead to inflation as demand outstrips supply in
the economy. higher interest rates, which may discourage private investment and
economic growth.

- Budget deficits and debt: Excessive government spending can lead to budget deficits
and a growing national debt, which may have long-term negative consequences for the
economy.

- Misallocation of resources: Government spending may not always be directed towards

the most productive uses, leading to inefficiencies in the allocation of resources.

- The compensatory fiscal policies of the government may discourage private investment,
since the private entrepreneurs must face competition from public enterprises in securing
labour, raw materials, and finances. This means that when the government increases its

15
spending on public services and projects, it can lead to a decrease in private spending by
individuals and businesses because the government may be taking up a larger share of the
available resources, leaving less for private entities to invest or spend.

- In case a balanced budget as a tool of fiscal policy is used during an economic

depression, and the recipients have a lower propensity to spend than the taxpayers, then
fiscal programs under a balanced budget will lead to a decrease in national income.

- If the tax measures are stringent and too high, they will certainly affect the incentive
to work thus causing unemployment.

- The use of fiscal instruments during unemployment and depression is often associated
with the subsequent problem of debt management. Because deficit budgeting is the normal
fiscal cure, public debt is made for financing it. And if the process of recovery from
depression is long, the creation of budget deficit year after year will create a huge problem
of debt repayment and debt management.

Large deficit programs financed by borrowings bring about adverse psychological

reactions. Allegations of government bankruptcy discourage investors and often flight of
capital takes place.

- The creation of additional income through compensatory fiscal measures is not easily
possible in most of the underdeveloped countries mainly because they are largely reliant
on an agricultural sector that is not growing, resulting in a high propensity for people to
spend their income on consumption rather than saving leading to a limited surplus
available for sale on the market.

- In a democracy, implementing fiscal policy measures takes a significant amount of

time. This is because legislative actions, administrative tasks, and the executive
processes involved in making these decisions often face delays. As a result, the initial
estimates of how much revenue the government will earn and how much it will spend
can become outdated or no longer accurate hence hindering economic growth progress.
13) An economic depression is a severe and prolonged downturn in economic activity
characterized by a significant decline in GDP (Gross Domestic Product), widespread
unemployment, reduced consumer spending, declining business investment, and
overall economic hardship.
(1mark)
Economic depressions are generally considered detrimental to the economy and society as
a whole due to their severe and prolonged negative impacts. However, in some cases,
certain positive effects or outcomes may arise as a result of economic depressions.

16
Positive effects that could occur during or after an economic depression:(1mark
x7=7marks)

 Innovation and technological advancement: Economic downturns can drive

innovation as businesses seek more efficient and cost-effective solutions to survive,
leading to technological advancements that may benefit society in the long run.
Financial practices, which can contribute to greater financial stability in the long term.
Innovation and technological advancement: Economic downturns can drive
innovation as businesses seek more efficient and cost-effective solutions to survive,
leading to technological advancements that may benefit society in the long run.
 Increased savings: During periods of economic uncertainty, individuals and
businesses may increase their savings and adopt more conservative financial practices,
which can contribute to greater financial stability in the long term.
 Reduced environmental impact: Economic depressions often result in reduced
industrial activity and consumption, leading to lower emissions and environmental
impacts in the short term.
 Opportunities for entrepreneurship: Economic downturns may create opportunities
for new businesses to emerge, as entrepreneurs identify unmet needs and develop
innovative solutions to address them.
 Realignment of industries: Depressions can lead to the realignment of industries,
with less efficient or outdated sectors shrinking while more dynamic and competitive
sectors emerge, potentially fostering long-term economic growth.
 Increased focus on sustainability: Economic crises may prompt businesses and
policymakers to prioritize sustainability initiatives and environmentally friendly
practices as part of efforts to rebuild and create a more resilient economy.
 Labor market flexibility: Depressions can lead to increased flexibility in labor markets,
as employers may be more willing to experiment with alternative work arrangements
and employment models.
 Improving of economic policies: Economic depressions often prompt policymakers to
reevaluate existing economic policies and institutions, potentially leading to reforms
aimed at improving long- term economic stability and resilience.
 Greater community cohesion: Economic hardships can foster a sense of solidarity
and mutual support within communities, leading to increased collaboration and
resilience at the local level.
 Increased focus on mental health and well-being: Economic depressions may raise
awareness of mental health issues and prompt individuals and organizations to
prioritize mental health and well-being initiatives.

17
 Emphasis on sustainable consumption: Depressions can lead to a shift towards more
sustainable and responsible consumption patterns as consumers become more mindful
of their purchasing decisions and environmental impacts.
 Renewed emphasis on education and skills development: Economic downturns may
prompt individuals to invest in education and skills development to enhance their
employability and adapt to changing economic conditions.
 Provide opportunities for individuals and businesses to renegotiate debt terms and
restructure their finances, potentially reducing financial burdens in the long term.
 Political and institutional reforms: Economic crises can create momentum for
political and institutional reforms aimed at addressing systemic weaknesses and
improving governance, transparency, and accountability.

While these potential positive effects may emerge during or after an economic depression,
it's essential to recognize that they are often accompanied by significant challenges and
hardships. Economic depressions are severe and prolonged downturns in economic activity
that can have far-reaching negative effects on individuals, businesses, and society as a
whole. Negative effects commonly associated with economic depressions:(1mark x
7=7 marks)

 High unemployment: Economic depressions typically result in soaring unemployment

rates as businesses reduce their workforce or shut down altogether, leading to
widespread job loss and financial insecurity for individuals and families.

 Decline in GDP: Depressions are characterized by a significant contraction in Gross

Domestic Product (GDP), indicating a decrease in overall economic output, production,
and consumption.
 Business bankruptcies: Many businesses may be unable to survive during a
depression due to reduced consumer spending, tight credit conditions, and declining
demand, leading to widespread bankruptcies and closures.
 Financial distress: Economic depressions can lead to widespread financial distress
among individuals and households, as they struggle to meet their financial obligations,
including mortgage payments, loan repayments, and utility bills.
 Reduced consumer spending: During a depression, consumer confidence tends to
plummet, leading to a sharp decline in consumer spending on goods and services,
further exacerbating economic contraction and prolonging the downturn.
 Deflation: Depressions often result in deflationary pressures, where prices of goods and
services decline due to weak demand, excess capacity, and a lack of pricing power
among businesses, leading to falling wages and profits.

18
 Bank failures and financial crises: Economic depressions can trigger widespread bank
failures and financial crises as banks experience rising loan defaults, liquidity
shortages, and capital depletion, leading to a loss of confidence in the financial system.
 Poverty and homelessness: Economic depressions can push many individuals and
families into poverty and homelessness as they struggle to afford basic necessities such
as food, shelter, and healthcare.
 Social unrest and political instability: Economic depressions often fuel social unrest
and political instability as individuals and groups express frustration and anger over
deteriorating living conditions, rising inequality, and perceived government failures.
 Health impacts: Economic depressions can have adverse health impacts, including
increased stress, anxiety, depression, and substance abuse, as individuals grapple with
financial insecurity, job loss, and social dislocation.
 Reduction in investment and innovation: Depressions typically lead to a decline in
business investment and innovation as firms cut costs, scale back expansion plans,
and focus on survival rather than growth and innovation.
 Long-term economic scarring: Economic depressions can leave lasting scars on the
economy, including lower productivity, reduced potential output, and a loss of human
capital, which can hinder economic recovery and future growth.
 Rise in inequality: Economic depressions often exacerbate income and wealth
inequality as vulnerable groups, such as low-income workers, minorities, and the
unemployed, bear the brunt of the economic downturn, while the wealthy may be better
able to weather the storm.
 Negative effects on global economy: Depressions in one country or region can have
negative effects on the global economy through reduced trade, investment, and financial
contagion, leading to synchronized downturns and prolonged recessions worldwide.
 Psychological and emotional toll: Economic depressions can take a significant
psychological and emotional toll on individuals and communities, leading to feelings of
despair, hopelessness, and helplessness as they grapple with the challenges of
unemployment, poverty, and uncertainty about the future.

14) Evaluate the role of the central Bank in the development of a country’s
economy. (15 marks)

A central bank is a financial institution that is responsible for overseeing the monetary
system and policy of a nation or group of nations. It is an institution that manages the
currency and monetary policy of a country. In Rwanda, National Bank of Rwanda (NBR) is
the central Bank. (1mark).
The central bank plays the following developmental and promotional role in the
development of a country’s economy.

19
 The central bank helps the government in the economic planning process. i.e., it
provides the necessary financial economic data which greatly facilitates government in
its planning process.
 The central bank through its monetary policy tools, like selective credit control;
  helps channel credit to the priority areas aimed at improving productivity and
investment.
 The central bank develops the financial sector e.g., it encourages the development of
commercial banks which tend to extend credit to stimulate rural activities for the
mobilization of domestic capital required for economic development.
 It regulates and controls the supply and demand for money with the objective of
attaining high growth rates in GDP adequate employment opportunities, price stability
etc.
 Through favourable rate policies aimed at foreign exchange stability, both the public
and private sectors are encouraged to save and invest thus promoting economic
growth and development.
 Ensures and maintains price stability, enhances, and maintains a stable and
competitive financial system which controls inflation in the economy thus encouraging
productive activities in the economy. This promotes employment opportunities,
promotes growth and fights BOP problems as well.
 As a banker to commercial banks and other financial institutions, National Bank
facilitates funds transfer and settles interbank transactions e.g., borrowing from
and lending to other banks and customer transactions. This promotes local and
international transactions.
 Debt Management: The Central Bank undertakes the selling and buying of government
bonds and making timely changes in the structure and composition of public debt. This
increases investment in government securities that promotes the level of investment
and productivity.
 Credit Control: Central Bank controls credit in order to influence the patterns of
investment and production in an economy. It controls inflationary pressures arising in
the process of development. This requires the use of both quantitative and qualitative
methods of credit control in order to regulate the level of economic activities.
 Solving the Balance of Payments Problem: The central bank manages and controls
the foreign exchange of the country and also acts as the technical adviser to the
government on foreign exchange policy. It therefore avoids fluctuations in the foreign
exchange rates and maintains stability. It does so through exchange controls and
variations in the bank rate. For instance, if the value of the national currency continues
to fall, it may raise the bank rate and thus encourage the inflow of foreign currencies.
Branch Expansion: In developing countries, the commercial banks generally
concentrate their branches in the urban areas. To extend credit facilities to the

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 agricultural sector, the central bank prepares program for branch expansion in the
rural areas. This gives chance to rural people to access such banks for credit and
deposit services.
 Development of Banking Habits: Through its various credit control
instruments (i.e., bank rate, variable cash-reserve ratio, etc.) and by providing
discounting facilities to the commercial banks, the central bank exercises full control
over the activities of commercial banks. This creates public confidence in the banking
system and helps in the development of banking habits of the people.
 Training Facilities: A major difficulty in developing the banking system in developing
countries is the lack of trained staff. The central bank can provide training facilities to
meet the personnel requirements of the banks which increases efficiency in the banking
sector.
 Proper interest rate Structure: The central bank helps in establishing a suitable
interest rate structure to influence the direction of investment in the country. In
underdeveloped countries, a policy of low interest rate is necessary for encouraging
investment and promoting development activities. Again, by adopting different interest
rates, the central bank increases productive investment and discourage unproductive
investment.
 Other Promotional Roles: The central bank also provides several other promotional
facilities. For example, it adopts policies to provide help to the various priority sectors,
such as agriculture, cooperative sector, small scale sector, export sector, etc. It provides
guidelines to be followed by the planners about some definite patterns of economic and
investment policies; and it publishes information regarding the state of the economy
and promote research in money and banking all which have positive influence towards
the confidence in and economic progress of a developing economy.

Promotes the process of economic growth: The central bank ensures adequate
monetary expansion in the country. Moreover, as a banker to the government, the
central bank provides funds for initiating investment in the public sector. This
increases the volume of productivity thus growth. (2marks x7= 14marks)

15) a. Inflation is a situation where there is a persistent rise in the general price level.
(1mark)
b. Stagflation: This refers to the situation where there is coexistence of both inflation and
unemployment in an economy. (2marks) While Reflation is the deliberate government
policy of forcing prices upward to recover the economy from a depression. (2marks).

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c. In case I were appointed a Senior Adviser to the Minister of Finance and Economic
Planning, I would put up the following policy measures to restore price stability in the
economy:
- I can work hand in hand with the central bank to adjust monetary policy tools such as
interest rates to control inflationary pressures. Increasing interest rates can help reduce
inflation by reducing aggregate demand.
- Ensure stability in the exchange rate to minimize imported inflation. This may involve
interventions in the foreign exchange market to manage fluctuations in the value of the
domestic currency.
- Implement fiscal measures to control government spending and reduce budget deficits.
This can include cutting unnecessary expenditures and increasing taxes to reduce
aggregate demand in the economy.
- Invest in infrastructure and streamline regulatory processes to improve productivity and
supply responsiveness in key sectors. Increasing the supply of goods and services can help
alleviate inflationary pressures.
- Consider implementing temporary price controls on essential goods and services to
prevent excessive price increases during periods of high inflation.
- Promote competition in markets to prevent monopolistic practices and price gouging.
This can involve stricter enforcement of antitrust laws and regulations.
- Implement fiscal measures to control government spending and reduce budget deficits.
This can include cutting unnecessary expenditures and increasing taxes to reduce
aggregate demand in the economy.
- Invest in infrastructure and streamline regulatory processes to improve productivity and
supply responsiveness in key sectors. Increasing the supply of goods and services can help
alleviate inflationary pressures.
- Consider implementing temporary price controls on essential goods and services to
prevent excessive price increases during periods of high inflation.
- Promote competition in markets to prevent monopolistic practices and price gouging.
This can involve stricter enforcement of antitrust laws and regulations.
- Invest in agricultural research and development to increase productivity and reduce food
prices.
- Invest in education and skills development programs to enhance human capital and labor
productivity. A more skilled workforce can contribute to economic growth and mitigate
inflationary pressures.
- Adopt an inflation targeting framework where the central bank sets explicit inflation
targets and adjusts monetary policy to achieve those targets.
- Etc. (2marks x 5 = 10marks)

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16) a) Rural-urban migration is a process whereby individuals move from rural to
urban areas with an intention of staying.
(1mark)
b) Negative effects of rural-urban migration to the development:
- Open urban unemployment. Because of the constant movement of people from rural
areas, there will be an increase in the number of people in urban areas who will be idle
without jobs.

- The problem of dependents. Normally when the people move to urban areas, they tend to
stay with their relatives. Therefore, they may cause increased dependency on the side of
their hosts which leads to low standards of living.

- Creation of slums. The presence of many people from villages to towns may cause scarcity
of housing facilities. This in conjunction with low incomes may cause the people to develop
shanty housings leading to creation of slums.

- Government expenditure on social services increases. There will be increase in

government expenditure on social services like hospitals and schools among others to cater
for the growing population in the urban centres.

- High cost of living in urban areas. The increase in the number of people in urban centres
will lead to an increase in the demand for the goods and services. This may not be
accompanied by corresponding increase in the supply of goods. In the end, the prices will
go up.

- The demand for social services exceeds the supply. There will be strain on the social
services in the urban centres. This is because there is increase in the number of users and
in the end, there will be high costs of maintenance.

- Food prices increase as well as house rents. The prices of food as well as house rent will
shoot up due to the increase in the number of users and in the end problems of poor
standards of living and welfare will come up.

- Low agricultural output. Agriculture is mostly carried out in rural areas; therefore, the
increase in rural-urban migration means that the number of energetic young men and
women who would stay and produce food will be moving to urban centres. Therefore, there
will be reduced productivity in rural areas.

- Rural development will be delayed. This is because as more and more people move to
urban centres, the government will concentrate on the urban centres and neglect the rural
areas since there are fewer people hence rural under development.

-Etc. (1mark x 7 = 7marks)

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c. Policy measures to control rural –urban migration:

- Improve infrastructure such as roads, electricity, water supply, and

telecommunications in rural areas to make them more attractive for living and
working.

- Encourage the development of rural industries, agriculture, and services to create

more job opportunities locally.

- Provide quality education and skill development programs in rural areas to

equip residents with the necessary skills for employment and entrepreneurship.

- Ensure access to basic healthcare services in rural areas to improve the quality
of life and reduce the need to migrate for medical care.

- Implement policies that support small-scale farmers, promote sustainable

agriculture practices, and provide access to markets and credit to enhance rural
livelihoods.

- Expand access to financial services such as banking, microfinance, and

insurance in rural areas to support economic activities and investment.

- Improve housing conditions and provide basic amenities such as sanitation, clean
water, and waste management in rural areas to enhance living standards.

- Promote the use of information and communication technologies (ICTs) to

facilitate access to information, markets, and services in rural areas.

- Implement land reform policies to address issues of land ownership,

distribution, and tenure security, which can contribute to rural development
and reduce land-related conflicts.

- Raise awareness about the opportunities and challenges of rural living and
empower local communities to participate in decision-making processes related
to development initiatives. Etc. (1mark
x7=7marks)

END

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