Question 3:

(a)   Evaluate as accurately as you can the manner in which each of the following individuals would be affected by fairly rapid inflation.

(i)                 A department store assistant

 

(ii)               A car assembly line worker

 

(iii)             A heavily indebted farmer

       (iv)              A retired business person whose current income is from interest on government bonds

 

(v)                The owner of an independent corner shop.

 

(b)   Explain and illustrate:

(i)                 “Policies that stimulate the domestic economy tend to cause a trade deficit.”

 

(ii)               “A deficit on the balance on current account will impose severe constrains upon domestic economic policies.”

(c)   Explain how an increase in aggregate demand that increases real domestic output towards the full employment level may generate instability in the price level. What is this effect referred to us?