Complete the following sentence: In terms of the AD-AS model, a decrease in the interest rate leads to a[n)

Answer 12) option A is correct

• A justification for government intervention in the economy arises from the fact that market systems usually produce efficient outcomes, but they do not necessarily produce equitable outcomes
  • Reason: The theory of free market by Adam smith explains that if left free, market forces will drive towards an efficent level of output and income because of self interest of consumers and suppliers.
  • However, the distribution of resources would be based only on profit considerations and not on the principles of equity
• option b is incorrect, markets never provide an equitable solution on their own
• option c is incorrect, as a government intervention cannot be justified based on profit considerations alone. Government interventions are mostly welfare oriented
• Option d is incorrect, as not all markets provide profitable outcomes, for examples, an oligopoly market is driven more by the objective of capturing higher share of market, than making profits, and the outcome is not efficient

Answer 13) Option D is correct

When the government uses its overdraft facilities at the central bank, it increases the quantity of money supplied in the economy. This is called inflationary financing.

• Reason: Using an overdraft facility is equivalent to taking credit from the central bank. This money is then spent in the economy and the supply of money rises.
• this leads to a situation where too much money is chasing too few goods in the market. it leads to inflation, thus it is called inflationary financing

• option A is not correct, because an increase in the money supply is not deflationary. Its inflationary ( as explained above)
• Option B is not correct, because taking credit from the central bank in form of overdraft facility will increase the money supply
• option C is incorrect, because neither taking credit from the central bank will decrease money supply, nor will it lead to deflation

Answer 14) The correct option is D

According to the fisher equation of interest rate,

Nominal interest rate = real interest rate + expected inflation

so, putting in the values, we get nominal interest rate = 7% + 5%

nominal interest rate = 12%

Thus option A, B and C are incorrect