4.4 Monetary policy

Monetary policy has changed in Ethiopia in recent years. The country\'s central bank now uses changes in the interest rate rather than controls on bank lending. It has also moved from operating a fixed exchange rate to a floating exchange rate. The Ethiopian Government uses a range of supply-side policy measures. The government has privatised some sugar processing firms, but most large firms are still state-owned.

a) Identify two causes of an increase in the demand for bank loans.

Estonia's factor of production are employed in a range of industries including education. In 2022, the country experienced a shortage of teachers. The government increases teachers' wages to attract workers from other industries. Two of Estonia's other industries are building and clothing. Estonia's clothing industry has firms of different sizes. Estonia's firms were affected in 2022 by the government increasing the money supply.

d) Discuss whether or not an increase in the money supply will benefit an economy. [8]

One reason why the price of houses in cities such as Hong Kong, London, and New York is very high, is the low price elasticity of supply of houses. Trade unions in some of these cities are calling for more affordable housing for workers. Governments are also trying to implement various microeconomic policy measures to reduce the price of houses. In addition, the stability of the housing market can impact upon the effectiveness of monetary policy.

d) Discuss whether or not a decrease in the rate of interest will increase a country's GDP. [8]

While 15% of US exports go to Mexico, 80% of Mexico's exports go to the US. In 2019, the US government imposed some methods of protection to reduce imports from Mexico. This US action caused a fall in Mexico's foreign exchange rate. Despite a rise in its inflation rate, Mexico's central bank reduced the rate of interest from 7.75% at the end of 2019 to 6.5% in March 2020.

d) Discuss whether or not a decrease in the rate of interest will increase a country's GDP. [8]

It is estimated that half of Egyptian men smoke. This is one of the highest rates in the world. In recent years the Egyptian government has increased the tax on cigarettes. The government and central bank have also tried to reduce inflation and improve Egypt's international trade performance. The Egyptian government could use subsidies to reduce its deficit on the current account of its balance of payments.

c) Analyse how a central bank could reduce inflation. [6]

A number of countries are withdrawing high value banknotes. For instance, Singapore plans to stop issuing its $10000 note. High value notes were originally intended to act as a convenient store of value. Central banks are concerned some notes are now being used illegally. The Singapore Police Force and the Monetary Authority of Singapore (its central bank) were trying to recruit more workers in 2017. It was expected that the central bank would raise the rate of interest in 2018.

d) Discuss whether or not a central bank should raise the rate of interest. [8]

African countries are expected to experience growth in their output. It is also predicted that Africa's population will increase from 1.1bn in 2017 to 4.2bn by 2100, when Nigeria will account for one in twelve of the world's births. Nigeria and South Africa are expected to experience the greatest rise in investment (spending on capital goods) over this period, and a change in their gender distribution.

d) Discuss whether or not a cut in the rate of interest will increase investment. [8]

In early 2016, the central bank of the Republic of Turkey cut interest rates five times. This was despite an inflation rate of 7.6%. The economy had a combination of a low saving rate and weak investment. To stimulate economic growth the Turkish government announced a package of reforms including subsidies for research and investment.

c) Analyse the impact of a cut in interest rates on saving and investment. [6]