a.) Explain FIVE disadvantages of a managed floating exchange rate.

[5 marks]

Volatility and Uncertainty: despite the fact that the critical bank intervenes inside
the forex marketplace to stabilize the currency, the managed floating gadget can nevertheless bring
about considerable volatility, particularly if there are sudden monetary shocks or
speculative sports, main to uncertainty in the market.

Price of Intervention: The government or significant financial institution wishes to

have enough foreign foreign money reserves to interfere inside the market. steady intervention can
be costly and can lead to depletion of reserves if no longer controlled well.

Chance of Overvaluation or Undervaluation: The change rate may emerge as artificially puffed
up or undervalued due to significant bank interventions, distorting change and funding flows. this
may damage exports or imports in the end, affecting the general economy.

Marketplace Distortion: common intervention in the forex marketplace can distort

the genuine market cost of the foreign money, leading to inefficient allocation of sources and
mispricing of goods and offerings in international alternate.

Inflationary strain: If the significant financial institution makes use of financial rules like
printing cash to shield the exchange fee, it can cause inflationary pressures within the economy,
as immoderate money supply ought to push up home expenses.

b. Discuss five reasons why the high cost of living is a major policy issue in developing countries.
[5 marks]

Income Inequality: in many growing nations, profits distribution

is uneven. excessive charges of dwelling disproportionately affect decrease-
earnings families, growing poverty stages and social inequality, making it a
prime coverage difficulty.

Unemployment and Underemployment:

High residing prices blended with excessive unemployment costs in growing nations put further eco
nomic strain on families, making it harder for people to afford basic goods and services.

Stress on government Budgets: Governments in developing international locations may

additionally face stress to subsidize vital goods, such as meals and electricity, if you want
to lessen the fee of living, leading to huge public expenditure deficits.

Inflation: growing fees of basic requirements, inclusive of meals and housing, can cause inflation.
This, in turn, erodes the buying energy of the populace, lowering the usual of dwelling for
plenty humans.

Terrible impact on savings and investment: With the growing cost of dwelling, human
beings have much less disposable income for financial savings or investment, which
hampers economic growth and improvement in the long term.

c. Outline six roles played by commercial banks in the economic development of a country.
[6 marks]

Mobilizing savings: commercial banks encourage savings by way of offering interest-

bearing bills. these savings can then be used to fund investments that make a
contribution to financial increase.

Offering credit: via lending to people, companies, and governments, industrial banks
facilitate investment and consumption, that are essential for financial development.

Facilitating alternate: via services like letters

of credit, industrial banks assist facilitate each domestic and international trade, which is vital for
the increase of groups and the overall economy.

Financial Inter-mediation: commercial banks act as intermediaries between savers

and debtors, making sure that sources are allotted efficiently to effective sectors of the economic
system.

Selling Entrepreneurship: by means of offering loans and

financing alternatives, commercial banks encourage entrepreneurship, which ends up
in the advent of latest corporations, activity opportunities, and innovation.

Assisting government economic coverage: industrial banks play a

key function in authorities borrowing by shopping authorities securities, for that
reason helping national monetary balance and increase.

d. Four techniques that growing nations might follow to accurate the balance of fee Deficit [4
marks]
Valuation of foreign money: by using devaluing the local forex, a rustic could make its
exports inexpensive and more aggressive in global markets, even as making imports extra costly,
thereby improving the exchange stability.

Import Substitution: developing nations can encourage domestic production of goods that
would otherwise be
imported, decreasing the demand for overseas currency and improving the balance of payments.

Export merchandising: Governments can offer incentives like subsidies, tax breaks,
or exchange agreements to encourage the growth of exports, which will increase foreign
exchange income and enables reduce the deficit.

Foreign funding attraction: by using developing a

conducive surroundings for foreign direct investment (FDI), international
locations can boost their foreign exchange reserves and improve their balance of bills via capital
inflows.

e. Explain five monetary policies that the central bank of a country might apply to control inflation.
[5 marks]

Raising interest rates: by means of increasing the policy hobby rates, the principal financial
institution could make borrowing greater luxurious, thereby reducing patron and commercial
enterprise spending, which facilitates lower inflationary pressures.
Open market Operations: The imperative bank can promote government securities within
the open marketplace to absorb extra liquidity within the economic
system, decreasing the cash deliver and helping manage inflation.

Growing Reserve requirements: with the aid of requiring commercial banks

to maintain a higher percent of deposits in reserve, the crucial financial institution can lessen the
quantity of cash to be had for lending, curbing inflationary pressures.

Forex Stabilization: The critical financial institution may additionally interfere inside
the forex marketplace to stabilize the foreign money and reduce inflation caused
by imported goods, mainly while a rustic is highly reliant on imports.

Controlling credit score expansion: The central financial institution can impose stricter
lending criteria on industrial banks, restricting the quantity of credit
score prolonged to clients and organizations, therefore decreasing inflationary call for.

f. Evaluate five causes of rising foreign debt in least developed countries.

[5 marks]

Over borrowing: Least evolved international locations frequently borrow excessively

from overseas creditors to finance huge-scale infrastructure initiatives or
meet budget deficits without ok making plans or capacity to pay off.

Excessive-hobby prices: overseas loans can be presented at high interest quotes, particularly if the u
. s . a . is perceived as a high-hazard borrower, leading to a fast boom in debt payments.

Trade rate Depreciation: A depreciation of the neighborhood forex will

increase the fee of overseas debt payments, contributing to the boom of foreign debt
in growing international locations.

Declining Export sales: If a rustic’s exports decline due

to damaging international marketplace conditions or a lack of diversification, it may struggle to
generate overseas currency for debt servicing, leading to higher debt accumulation.
International economic Shocks: natural screw ups, economic crises, or commodity rate fluctuations
can negatively impact the economic balance of growing nations, forcing them to
borrow extra to cowl the price range deficit and to stabilize their economies.

g. Distinguish between “debt distress” and “debt conversion”.

[5 marks]

Debt distress:

Definition: Debt misery refers to a situation in which a borrower (typically a central

authority, enterprise, or man or woman) faces giant issue in meeting its debt responsibilities. this
will be due to cash float troubles, financial downturns, or mismanagement.
traits:
financial pressure: The borrower struggles to make well timed payments of important and interest.
chance of Default: there's a high hazard that the borrower will default at the debt.
feasible answers: Restructuring or renegotiation of debt, deferring payments, or in search
of external help (e.g., bailouts).
Examples: A organization experiencing economic distress because
of declining income, unable to carrier its bonds or loans.

Debt Conversion:

Definition: Debt conversion refers to the process through which a borrower or issuer converts its
debt into equity or other economic contraptions, usually to lessen the load of debt reimbursement.
traits:
Debt-for-fairness change: The lender might also agree to convert the debt into possession shares in
the organisation or other styles of securities.
discount in Debt Load: This procedure helps lessen the overall quantity of debt the borrower ought
to pay off.
company Restructuring: regularly a part of a broader restructuring plan to stabilize the business
enterprise's budget.
Examples: A organization changing its bonds into inventory to avoid default, or a
government changing countrywide debt into long-time period securities to control debt provider.
h. Discuss sets of economic reforms that the Bretton Woods financial institution may impose on a
country.
[10 marks]

Privatization and Deregulation: Encouraging or forcing international locations to privatize state-

owned enterprises and decrease authorities intervention in
the marketplace to growth efficiency, competition, and monetary increase.

Austerity Measures: imposing cuts in government spending, will increase in taxes, and discounts in
public sector wages to reduce financial deficits and manage inflation.

Market Liberalization: Recommending rules that eliminate trade obstacles, lessen tariffs,
and sell unfastened-market capitalism, permitting greater overseas funding and trade.

Monetary coverage Reforms: Advising countries to put into effect stricter monetary policies to
control inflation, stabilize the foreign money, and ensure a strong monetary machine.

Structural adjustments: Encouraging reforms in agriculture, industry, and

public administration to decorate economic efficiency and productivity, which may
additionally consist of land reforms, labor market flexibility, and discount of subsidies.

Debt Restructuring: supplying technical and monetary assist for international

locations facing outside debt crises, regularly via debt rescheduling
or decreasing the fundamental quantity owed.

Foreign money Stabilization: Recommending the adoption of exchange fee regimes

that sell stability and decrease volatility, which may additionally encompass adopting a
pegged exchange fee or stepping into a foreign money union.

Social quarter Reforms: Encouraging schooling and fitness reforms which could foster long-time
period sustainable development and human capital investment, regardless of feasible quick-
term social costs.

Governance and Transparency: Recommending reforms to decorate governance, reduce corruption,

and enhance the overall commercial enterprise environment to draw funding.

Capital market development: Requiring countries to increase and deepen their capital markets with
the aid of introducing regulatory frameworks to inspire non-public investment, specially in
infrastructure.

Finish

i. Explain five disadvantages of a managed floating exchange rate.

[5 marks]

Danger of market Distortion: valuable financial institution interventions inside

the forex market can lead to synthetic alternate rates that do not reflect the genuine market cost of
the foreign money. this can distort exchange balances, because the currency can be hyped up or
undervalued due to manipulation.

Uncertainty and Volatility: even though the forex is permitted to glide, the critical financial
institution's interventions can create uncertainty within the forex marketplace. Speculators can
also act on perceived future interventions, main to multiplied volatility and making
it harder for businesses to plot and forecast prices.

High charges of Intervention: while a relevant bank intervenes to persuade the exchange price,
it often desires to buy or sell big amounts of foreign forex, which can be high
priced. extended intervention may
additionally drain forex reserves, decreasing the ability to reply to other monetary demanding
situations.

Capability for Inflation: If a critical financial institution buys foreign currencies or engages
in other interventions to weaken its very own forex, it can lead to inflationary pressure. A
weaker foreign money can make imports more steeply-
priced, raising the price of living, specially for countries that rely closely on imported items.

Political have an impact on: The managed floating machine leaves room for political
interference within the exchange charge rules. Governments can also stress critical banks
to interfere in approaches that are politically useful within the short term (e.g., to make exports less
expensive), however this could result in long-term financial problems, inclusive of trade imbalances
or outside debt.