Question

a.          Reflecting on the above situation justify whether the State Bank of Pakistan should opt for easy or tight monetary policy as a stabilization policy. Also illustrate it graphically. (2.5 Marks)

 

b.          Reflecting on the above situation justify whether the Government of Pakistan should opt for expansionary or contractionary fiscal policy as a stabilization policy. Also illustrate it graphically.   (2.5 Marks)

        

Answer 1

$$Solution$$

A] Pakistan’s annual consumer price inflation (CPI) rate jumped to 11.10 percent by April, the country’s statistics bureau announced up from 9.05 percent in the previous month.

 Reflecting on the above situation the state bank of Pakistan should opt for a a tight monetary policy as a stabilization policy to prevent run away inflation in the long run.

B] Taking into account the above the Pakistan government should adopt a contractionary fiscal policy:

this is a fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes.