*NABTEB GCE ECONOMICS ANSWERS*
_SECTION A: ANSWER ONLY ONE(1)_
Cross elasticity of demand = %∆Qdx/%∆Py
Let x = Yam, Y = bread
Percentage change in quantity demanded of yam(x) = New Qd - Original Qd/Original Qd *100/1
= 240-80/80 * 100/1 = 160/80 *100/1
Percentage change in the price of bread(y) = New price - Original price/Original price *100/1
= 900-600/600 *100/1
= 300/600 *100/1
Cross elasticity of yam and bread = %∆Qdx/%∆py
= 200/50 = 4
If the quantity demanded for yam only increases from 80 to 160. The cross elasticity of demand will be;
Percentage change in quantity demand of yam (x) = New Qd - Original Qd/Original Qd *100/1
= 160-80/80 *100/1
= 80/80 *100/1
:. %∆Qdx/%∆py = 100/50 = 2
The cross elasticity for bread and yam is elastic because the elasticity is greater than 1
*_SECTION B: ANSWER ONLY 4 QUESTIONS_*
(i) Open market operation(OMO): This is the purchase or sale of securities on the open market so as to expand it restrict the volume of money in circulation. The central bank applies this policy with the aim of regulating the volume of money in circulation
(ii) Liquidity ratio/Cash rate: The commercial banks are mandated by the government to keep a special proportion, e.g 25% of their total deposit with the central bank in order to control their volume of credit.
(iii) Bank rate: Bank rate is the minimum rate of interest charged by the central bank for discounting the bill of exchange. By lowering or raising the rate, the central bank can control the activities of the commercial banks.
(iv) Special deposit: Special deposit is also an instrument of monetary policy which is used to restrict lending. The central bank can order the commercial banks for a special deposit, usually, a percentage of the banks deposits, to be made with it.
(v) Special directives: The central bank can issue direct or specific instructions to the commercial banks and other institutions to restrict their lending or credit policy or on the direction to which lending should follow. Moral suasion takes the form of directives. Moral suasion is a gentle appeal to commercial banks as to the kind of lending policy to pursue
(i) Higher interest rates
(ii) Lower exports.
(iii) Lower savings.
(iv) Harmful Effects on Capital Accumulation
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(i) Monetary policy: Higher interest rates reduce demand in the economy, leading to lower economic growth and lower inflation.
(ii)Control of money supply: Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.
(iii) Fiscal policy: a higher rate of income tax could reduce spending, demand and inflationary pressures.
(iv) Wage controls: trying to control wages could, in theory, help to reduce inflationary pressures
Supply refers to the amount of a given product or service that suppliers are willing to offer to consumers at a given price level at a given period.
(i) Production technology: an improvement of production technology increases the output. This lowers the average and marginal costs, since, with the same production factors, more output is produced.
(ii) Government policies: when taxes increase, the quantity supplied decreases because the cost of production increases. When subsidies increase, the quantity supplied increases because the cost of production decreases.
(iii) Expectations of producers: if producers expect a rise in the price of a product, they are likely to lower the quantity supplied and wait until the price goes up to sell the product at a higher price.
(iv) Prices of other products: the supply of a product may be influenced by the prices of other products, especially if the products are complementary.
(v) Prices of production factors: a rise in the price of one or more production factors leads to an increase in the production costs and vice versa.
(i) Breaking of bulk: The Wholesaler serves as a bulk breaker to the manufacturer to enable the retailer buy the goods. By buying the goods from the manufacturer and selling in a smaller unit to the retailers, the Wholesaler is helping the to make sure that the goods goes through the channels of distribution.
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(ii) Provision of transport: The existence of Wholesaler has largely made the Job of the manufacturer easy because they no longer have to go through the stress of distributing the goods to customers from different parts of the world. Wholesalers often provide transport needed in distribution. Sometimes, they send their vehicles to collect the goods from the manufacturers.
(iii) Warehousing: Another function of the Wholesaler is that he serves as a warehouse for the manufacturer. The wholesaler provides warehousing facilities to get rid of stock- biling at the production point. Goods are stored here until they are bought, hence it spurs the Manufacturer to keep on producing.
(iv) Information dissemination: Since the Wholesaler is more closer to the retailers and the consumers, he knows what they want and the complaints that has been made on the goods of the manufacturer. Conversely, his function is to share those vital information with the producer and then, the producer will try to produce a good that will more likely meet the test of the customer.
(v) Market research: The wholesaler carries out market research to provide a two-way flow of information relating to market situations between the manufacturer and potential buyers. This assists in the marketing of current products and development of new ones.