ECS2602 Assignment 1 Semester 2

1. 4 The correct option is 4. Statement a is incorrect. In this module, we look at monetary policy and fiscal policy as stabilization policies. Stabilization policy in terms of monetary policy refers to actions by the central bank to keep economic growth stable. When authorities want to boost the level of output and income, expansionary monetary policy is followed which entails an increase in the money supply to bring about a decrease in the interest rate in order to increase the demand for goods in the economy. When authorities want to cool down the economy a contractionary monetary policy is employed which entails a decrease in the money supply to bring about an increase in the interest rate in order to decrease the demand for goods in the economy. The South African Reserve Bank follows a policy of inflation targeting however, in this module we look at the role of the central bank in terms of influencing the level of output and income (GDP). ANS Compare statements b and f. Statement b is incorrect and statement f is correct. The main policy variable is money supply. Statement c is incorrect. The contractionary monetary policy implies a decrease in the money supply and therefore results in an increase in the interest rate. Statement d is incorrect. An increase in taxes implies the implementation of a contractionary fiscal policy. Statement e is correct. Statement f is correct.