Q1. Has the inflation in Spain increased or decreased in the past few years?

What about interest

rates?

Ans. The inflation has been fluctuating for the past years in Spain. According to data provided by
the World Bank the annual percentage of inflation in Spain has decreased. With the decreasing
inflation, the interest rates have also been decreased.

Q2. It history repeats……. Happen to:

a. Real Output:
The decline in money growth will cause the interest rate to increase. This leading to less
consumption and in the long run it will lead to lesser output. The increase in interest rate
will cause the cost of living to increase as well, which means less buying power. When
there will be no buyers then there will be a decline in the real output.
b. The inflation rate:
If there is a decline in money supply then there is an increase in the inflation rate. The
money being produced is less than the money demand.

c. Interest rates:
The decline in supply of money will result in an increase in interest rate. Less money
being made means more and more demand. In order to fulfil the demand the interest rates
increase so there is less buying power.

Q3. When was the most recession?

The most recession was from 2008 to 2014. The recession was caused by many reasons like
overvalued exports, the European Union recession and the collapse in the housing market.

Q4. When the interest rates fall, how might you change your economic behaviour?

The fall in interest rates mean there is no or less inflation and less demand of money. This means
that the government will probably apply expansionary monetary policy. Banks will start giving
out loans, the investments will increase eventually. More aggregate demand will lead to more
production which will lead to higher GDP.
Q5. Can you think of any……. Or worse off? Why?

Internet banking has changed the face of receiving money. In the early days, technology was not
so advanced hence people faced difficulty in sending and receiving money. I used to watch my
father go to a person who could arrange the transfer of money quick and will less fee. Now it can
be done with a click of a button. Banks have gone online, users can easily shop online and even
buy food online. Net banking also comes with a lot of security issues, it can easily be hacked and
your money can be stolen but it is all insured. Now after these inventions, you can even take out
funds from your accounts after office hours, thanks to the ATM system.

Q6. Is everybody worse off when interest rates rise?

Yes, when interest rates rise that result in inflation. In inflation the taxes increase, which makes
the cost of living expensive. It gets very hard for middle class or poor families to survive in such
a period. People lose their jobs, government increases taxes on everything. Demand gets low and
eventually the supply does too. Some companies even go bankrupt.

Q7. What is the basic activity of banks?

Banks have a bunch of activities, but the basic activity is receiving funds from people and giving
funds to people or institutions. Such activities can be performed through capital markets. Banks
also buy and sell bonds or shares. Banks provide many services such as savings accounts, where
people put loads of money into their account and the bank pays them interest on the money they
keep but investing them.

Q8. Why are financial markets important to the health of the economy?

Financial markets are those markets that take funds from people who have funds but don’t know
what to do with them to people who don’t have funds but know how to invest or utilise it.

Q9. Graph the following (1995 to present, all on the same graph)

 Federal funds rate

 1 month Eurodollar
 PKR to USD
 1 month Commercial paper (nonfinancial)
 3 month treasury bill (secondary market)
 Inflation
 Unemployment
 Interest rest