WAEC Past Questions and Answers - Page 3085

When the central bank increases the bank rate, the banks and individuals are discouraged from borrowing money because of increase in interest rates. This is used as a monetary policy tool to reduce circulation of money in the economy.  People would rather invest their monies to be paid high interest rates than borrow from banks and pay the bank interest.

A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold. Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.

This occurs when two people have goods they are both happy to swap in exchange. i.e. a perfect barter exchange. A requirement that must be met before a trade can be made. It specifies that a trader must find another trader who is willing to trade what the first trader wants and at the same time wants what the first trader has.

Precautionary Motive. A desire to hold cash in order to be able to deal effectively with unexpected events that require cash outlay.

There are five causes for demand-pull inflation:

1. A growing economy: When consumers feel confident, they will spend more, take on more debt by borrowing more. This leads to a steady increase in demand, which means higher prices.  
2. Asset inflation: a sudden rise in exports, which translates to an undervaluation of the involved currencies
3. Government spending: When the government opens up its pocketbooks, it drives up prices. Military spending prices may go up when the government starts to buy more military equipment.
4. Inflation expectations: forecasts and expectations of inflation, where companies increase their prices to go with the flow of the expected rise
5. More money in the system: demand-pull inflation is produced by an excess in monetary growth or an expansion of the money supply. Too much money in an economic system with too few goods makes prices increase.