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April 2016

Hi

Another question on this paper, question 4 (iv).

The question asks to suggest policies the govt could implement to bring economy out of recession. It lists the policies and their definitions but I am not sure what the policy would be to bring economy out of recession for some of the policies stated.

- Fiscal policy - understand, decrease tax and increase govt spending

- Exchange rate policy - think I understand, weaken currency to encourage exports and reduce imports (increasing the demand for domestic products by domestic consumers) thus increasing net exports. However, not sure whether a weaker currency would reduce demand for investment in the country by foreign investors, thus reducing the level of the current account.

- National debt management policy - not sure, could the policy be to decrease the level of long term bonds the government is issuing, this reduces supply, increasing price of bonds, thus decreasing long term bond yields, and simultaneously increasing the level of short term borrowing, thus increasing supply, decreasing price of bonds, increasing short term bond yields. However, I am not sure this would have the desired effect as it might encourage private investors to invest in shorter term bonds, which I am not sure is what we want... Can you help with this one?

- Prices and incomes policy - Not sure about this one, but I would guess recession is often associated with too low rates of inflation, or even deflation, the govt could increase the minimum wage to encourage wage inflation, the govt could introduce price floors to encourage price inflation. Can you provide any guidance?

Thank you,

Rachael
 
Hi
What you say above is generally correct. It does give some explanation about the forms of government policy in the solution, and the suggestion on prices and incomes is that the government can use control of prices and public sector wages to manage inflation and therefore bring an economy out of recession. On national debt, the suggestion is that interest rates at various terms can be manipulated by issuing (or not issuing) bonds at those terms. By managing interest rates the economy can be brought out of recession.
On your first question, a cash benchmark just means "did the manager get a better return than cash placed in a bank account"?
 
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