Practise applying interest rates, money supply and credit regulation to inflation or recession through AD/AS, then evaluating transmission, timing and alternative policy choices.
A central bank is asked by the government to help achieve price stability.
If inflation rises steeply, which policy will not be directly within the control of the central bank?
increasing the rate of interest to reduce consumer spending
managing a reduction of the money supply
using credit restrictions to regulate lending by commercial banks to households
restricting wage increases in the private and public sectors
An increase in interest rates is an example of which type of policy?
contractionary fiscal policy
contractionary monetary policy
expansionary monetary policy
restrictive supply-side policy
The COVID-19 pandemic had a very significant impact on the global economy in 2020. Negative economic growth rates were recorded for all major economies. The speed, unexpected and unprecedented nature of the downturns has been devastating for businesses, governments and populations. Individual economies reacted to the pandemic differently. Fig. 1.1 shows quarterly economic growth rates in 2020 for four selected countries compared to the OECD (Organisation for Economic Co-operation and Development) average.
Fig. 1.1 Annual change to quarterly gross domestic product (GDP) in selected countries in 2020 compared to the OECD average.
China's economic performance in 2020 was the exception. China was the first country to experience the pandemic. It has also been the first economy to recover from recession, a period of two consecutive quarters of negative economic growth. The Chinese government was quick to enforce lockdowns to limit the pandemic and there was rapidly increasing demand for exports of PPE (personal protection equipment) and other Chinese-made products.
The case of neighbouring South Korea was different. Like China, the impact of the pandemic was more effectively contained than in other economies and growth in South Korea's economy was less affected. There was, however, little evidence in the data that by the end of 2020, South Korea's economy would recover to its pre-2019 position of strong economic growth.
The economies of the US and the UK had negative quarterly economic growth throughout 2020. Economists in these countries have disagreed about how best to increase the rate of economic growth after the pandemic. The governments of both countries introduced very high government spending programmes to encourage the return to economic growth in 2021. However, monetary policies have been widely promoted by many economists as an alternative to more traditional fiscal measures.
Assess whether monetary policies are the best way for high-income countries such as the US and the UK to produce an economic recovery.