This question was not too popular with candidates; those who attempted it could differentiate between cash ratio and special deposit but could not explain how they are used as monetary policy instruments in the (b) part. Only few candidates had adequate knowledge of fiscal policy.

Candidates needed to state the following points to score maximum marks for this question.

(a) The cash ratio is the minimum ratio between the cash reserves of the commercial banks and their deposit liabilities to customers. On the other hand, special deposits are the additional cash reserves (over and above minimum cash requirement) that commercial banks are ordered to lodge with the central bank.

(b) Whenever it is desired to increase money supply, the cash ratio is reduced. On the other hand, whenever it is desired to reduce the money supply, the cash ratio is raised. Whenever it is desired to increase money supply, the special deposits of the commercial banks are reduced. On the other hand, whenever it is desired to reduce money supply, the central bank orders an increase in the commercial bank’s special deposit.

(c) (i) Taxation: Taxation which can be direct or indirect can be used to control aggregate demand. Direct taxes such as income tax and company tax can be used to reduce spending. Indirect taxes on the other hand can also be used to reduce spending, e.g. increase in value added tax or excise duties will increase prices and reduce purchasing power
(ii) Government expenditure can be increased or reduced to affect aggregate demand. If the objective is to increase spending, the government operates a budget deficit. If the objective is to reduce spending, the government operates a budget surplus.
(iii) The granting of subsidies can be used to increase production and investment.