atswa pilot questions answers part i - The Institute of Chartered ...

increasing her import prices. Devaluation will be effective in correcting
the BOP deficit if demand for exports and demand for import is price
elastic.
(iv) Encourage foreign investment: This will be capable of offsetting the
deficit since the inflows of financial resources are credit entry in the BOP
account. Thus the government should introduce policies that will attract
foreign investment.
(v)
QUESTION 5
Improve foreign exchange management: Foreign exchange management
policy must be designed to favour the importation of raw materials and
equipment that support local production and discourage importation of
finished consumers goods.
(Any 1 1/ 2 x 4 points) (6 Marks)
(Total 12 ½ Marks)
(a) Define the term „inflation‟.
(2½ Marks)
(b) Outline any THREE causes of inflation based on your country‟s experience.
(6Marks)
(c) List FOUR methods of controlling inflation.
(4Marks)
(Total 12½ Marks)
SOLUTION 5
(a)
(b)
(i)
Inflation can simply be defined as a persistent rise in the general price level of
goods and services. This occurs when too much money is chasing few goods.
When prices rise by more than 10 percent in a year, inflation becomes a
problem.
(2½ Marks)
Causes of Inflation:
Excessive demand: This is a situation where the demand for essential goods
generally exceeds their supply. In most West African Countries, demand for
goods and services has been rising faster than supply because of rapid
increases in the population. As a result of this, there will be disequilibrium in
the market which will eventually raise the prices of goods in the market.
(ii) Cost-push inflation: This is a situation where persistent rising costs of
production push the price level up. This will eventually be passed on to the
consumers in the form of higher prices. High cost of raw materials is also a
contributory factor to cost-push inflation.
(iii) Deficit Budgeting: This is a deliberate policy of the government by which it
spends more money than it collects in taxes to finance heavy investment or
capital expenditure. This will increase the purchasing power of the consumers
without a corresponding increase in the volume of goods. Thus raising the
prices of goods and services.
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