Question

Read the passage given below and answer the questions that follow.

Recently, Argentina has experienced a 25% surge in demand for its manufactured goods in global markets leading to a sharp increase in exports, particularly of electronics and consumer goods. Simultaneously, the Argentine government has ramped up its infrastructure by spending an additional $ 50 billion into the economy. The country was already operating at full employment. As a result of booming exports and government spending, aggregate demand has increased. Due to this excessive demand, the prices of food, housing, and energy have increased by an average of 32 percent over the past six months, resulting in significant inflationary pressure on the economy.

1. Identify and explain the economic phenomenon referred to above. [2] 
2. Draw a well labelled diagram depicting the economic phenomenon referred to in subpart (i). [2] 
3. Explain any one monetary measure that can help resolve the economic crises like inflation and recession. [2]
4. ‘Argentine government has ramped up its infrastructure by spending an additional $ 50 billion into the economy.’ State whether this is an induced or an autonomous investment expenditure. Explain. [2]

Answer 1

1. The economic phenomenon is Demand-Pull Inflation. This occurs when aggregate demand in an economy outpaces aggregate supply. In this scenario, the combination of a 25% surge in export demand and an additional $ 50 billion in government spending, while the economy was already at full employment, caused aggregate demand to exceed the economy's productive capacity, leading to a increase in prices [1].
2. 
   
3. Increase in the Cash Reserve Ratio (CRR) or Bank Rate: To curb inflation, the central bank can increase the repo rate or the reserve requirements for commercial banks. This reduces the money supply and increases the cost of borrowing, which lowers consumer spending and investment, thereby reducing aggregate demand and curbing inflation [1].
4. This is an autonomous investment expenditure. It is independent of the state of the economy or profit motives, as it is driven by government policy decisions to boost infrastructure, rather than being induced by changes in income or demand [1].