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1) Question: How does monetary policy affect the overall
economy?
Answer: Monetary policy, which involves the central
bank's control over the money supply and interest rates,
influences the economy by stimulating or slowing down
economic activity. For example, by reducing interest rates,
it can encourage borrowing and investments, thus
stimulating economic growth.
2) Question: What are the main differences between fiscal
policy and monetary policy in influencing the economy?
Answer: Fiscal policy involves government decisions
related to taxation, spending, and borrowing, while
monetary policy focuses on controlling money supply and
interest rates. While both can influence the economy, fiscal
policy directly impacts government revenue and
expenditure, while monetary policy primarily affects the
availability and cost of credit.
3) Question: Explain the concept of aggregate demand and
its components.
Answer: Aggregate demand represents the total spending
on goods and services in an economy. Its components
include consumption, investment, government spending,
and net exports. Consumption refers to household
spending, investment represents business and private sector
spending, government spending includes all government
expenditures, and net exports represent the difference
between exports and imports.
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