Practise macroeconomic objectives and government intervention through fiscal, monetary and supply-side policies, using AD/AS analysis, tax design and policy-effectiveness evidence.
Sweden had a change in its Consumer Prices Index (CPI) of -0.6 %.
Which combination of policies might its government use to restore price stability?
increase interest rates and increase indirect taxes
increase interest rates and reduce government spending
reduce government spending and increase income tax
reduce interest rates and increase government spending
The Lagos economy is working
Nigeria discovered oil 50 years ago and is now the world's sixth biggest oil exporter. The recent increase in global oil prices has had a very large positive effect on the country's balance of trade and has also improved the country's terms of trade.
Lagos is the largest city in Nigeria, with a population of over 20 million, and has undergone a successful economic transformation in recent years. It has used the private sector to become the most productive and dynamic part of Nigeria's economy. The owner of one of Nigeria's largest companies has stressed the enormous economic progress that the country has made in recent years: "I'm a great believer in Nigeria because the opportunities here are enormous." His company's success shows what private enterprise can achieve in a mixed economy especially if it is provided with the right incentives by the government.
Most Nigerian entrepreneurs are operating in Lagos and entrepreneurship has certainly played a key role in the modern Lagos economy. Start-up initiatives have been encouraged and the need to be innovative has been increasingly recognised, leading to the development of new goods, services and markets. The city is the centre of thriving music, fashion, film and technology industries that have significant influence throughout Africa.
A 'free trade zone' on the edge of Lagos has been established where private sector firms pay no business taxes to the government and there are now numerous start-up enterprises that are thriving. The government aims to lower costs, reduce bureaucracy and make the economy more flexible and efficient with the hope of boosting trade. The zone is located next to a deep sea port and has good road connections with both the rest of Nigeria and other countries in the region.
Lagos is an important transport hub, with three major ports and West Africa's most important international airport. In 2016 the output of Lagos was valued at US$136 billion while Nigeria's total national output was valued at US$405 billion.
A former governor of the Nigerian central bank, has stated: "Since 2000, Lagos has been transformed. In terms of an improved infrastructure and a supportive economic environment, the government has given firms a greater opportunity to thrive."
Source: Adapted from The Financial Times, 26 March 2018
Explain why 'free trade zones' (FTZ) can be considered a supply-side policy.
Latvia becomes a banking capital between the European Union's (EU's) east and west
Latvia regards itself as a financial bridge between Europe's east and west. Since the Soviet Union's collapse in 1991, Latvia (population 2.2 million) joined the EU (population 510 million) in 2004. It has since built itself into a banking centre for people from all parts of Europe and many other parts of the world, although its reputation as a financial centre has been growing since 1988 when two entrepreneurs founded a private bank, Parex Bank, in the capital, Riga.
In the early years of the 21st century, favourable credit conditions in Latvia contributed to an economic boom, but in the global financial crisis of 2007-2008 Parex Bank, by then Latvia's second biggest bank, needed government assistance and was nationalised.
The financial crisis caused Latvia's annual inflation rate to rise rapidly to in May 2008, which was significantly higher than its average annual inflation rate of for the period 1998-2018.
In 2008, the Latvian government decided to substantially reduce the size of the budget deficit, in an attempt to reduce the relatively high rate of inflation, through a series of fiscal measures such as increasing taxation and reducing public spending.
Latvia emerged from the global financial crisis to become the EU's fastest-growing economy. The intention was that Latvia would eventually join the EU's common currency (the euro). Fig. 1.1 below shows the exchange rate of Latvian Lats (the country's former currency) per euro from 2007 to 2013.
Fig. 1.1 Exchange rate of Latvian Lats per euro, 2007-2013
In January 2014, Latvia did join the euro and this was welcomed by business leaders and economists in Latvia, stating that it would improve Latvia's credit rating and attract foreign investors. The governor of Latvia's central bank said: "The euro brings stability and certainty, definitely attracting investment."
However, not everybody in Latvia supported the introduction of the euro. Many people thought that Latvia would lose a certain amount of economic independence and that it would lead to an increase in prices and taxes.
Sources: Adapted from The Financial Times 20 February 2018
Latvijas Banka, accessed October 2018
Explain what is meant by a 'budget deficit'.
Analyse, using a diagram, how fiscal measures to reduce the budget deficit could be used by the Latvian government to lower the relatively high rate of inflation.
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