Economics 11 HL – Test – Macroeconomics Name:

1. Study the extract below and answer the questions that follow:

CBO using fiscal policy to curb inflation: Sangour

Bloomberg News
Saturday, March 15, 2008 8:06:50 PMOman Time

By Matthew Brown
Bloomberg News
DUBAI — The Sultanate of Oman is using fiscal policy as the main tool to lower inflation as there are no plans to drop the rial’s peg to the US dollar, said Hamood Sangour Al Zadjali, executive president of the Central Bank of Oman (CBO). Fiscal policy “remains as the dominant policy option for the management of aggregate demand in a fixed-peg regime,” Sangour said in a fax sent to Bloomberg News yesterday.
Gulf states, including Saudi Arabia and the United Arab Emirates, have come under pressure to drop their dollar pegs as interest rate cuts by the US Federal Reserve have contributed to the US currency plunging to a record low against the euro and a 12-year low versus the yen. The weaker dollar has made European and Asian imports more expensive in terms of Omani rials, the value of which is fixed at a rate of 2.58 US dollars per rial.


Inflation in Oman accelerated to a record 8.3 per cent in December from 7.6 per cent in November as the cost of food and rent increased.
Oman has boosted salaries by as much as 43 per cent, increased social security payments and subsidised the cost of basic foods in an attempt to mitigate the effects of rising prices. Fiscal policy “has to contend with the current challenge of apparent trade-off between high diversified growth and inflation,” Sangour said.
“Since sustaining the growth momentum is highly essential for Oman’s economy, the fiscal response to inflation came in the form of compensating the public for the inflation-driven loss in their purchasing power through appropriate increases in their wages and salaries.”
Oman said on February 12 that it would tap its food reserves to sell rice, sugar and lentils at subsidised prices to help counter inflation.
However, Oman’s decision to raise wages for government employees by as much as 43 per cent may stoke inflation in the Gulf state, Standard Chartered Plc said on February 10.

a) Define the following terms indicated in bold in the text:

i) fiscal policy [2 marks]

ii) inflation [2 marks]

b) Using an appropriate diagram, illustrate the inflationary pressures currently being faced by Oman, as outlined in paragraphs 2 and 3 in the extract. [4 marks]

c) Using an appropriate diagram, illustrate the likely impact of the government measures designed to counter inflation outlined in paragraph 4. [4 marks]

d) Evaluate the economic policies being enacted by the government to combat inflation, looking not only at their effectiveness in reducing inflation, but also looking at how they might help to achieve other economic goals. [8 marks]