You're viewing 2 free preview questions for Economics HL — subscribe to unlock 226 more, plus the Full Question Bank, Mock Papers & Worksheets.Upgrade

Demand Management (Demand-side Policies) — Monetary Policy · Paper 2 — Free Economics HL Practice Questions

1MasteryLAQTools of monetary policy (intere10 marksPaper 2~15 min

A central bank in a developing economy faces annual inflation rate of

5.8\%

, above its target of

3.5\%

, while GDP growth is a moderate

2.1\%

following a recent recession. The central bank raises its benchmark policy interest rate by

0.50

percentage points. The reserve requirement ratio on demand deposits remains unchanged at

21\%

(a)

Using an AD/AS , explain how an increase in the policy interest rate can reduce inflationary pressure. [4 marks]

(b)

Evaluate the central bank's decision to use the policy interest rate rather than the reserve requirement ratio as its primary monetary policy tool, given that the economy is simultaneously recovering from recession. [6 marks]

Solutions

2MasteryLAQTools of monetary policy (intere10 marksPaper 2~15 min

The Reserve Bank of India (RBI) faced a policy dilemma in 2022. Inflation reached

6.7\%

, above the

4\%

target, driven by rising food and fuel prices. Bank credit to the private sector was growing at only

8\%

per year, considered insufficient to support post-COVID recovery. Between May and August 2022, the RBI raised the repo rate from

4.00\%

5.40\%

and simultaneously reduced the cash reserve ratio (CRR) from

4.5\%

4.0\%

of net demand time liabilities.

m = \frac{1}{\text{reserve requirement ratio}} \qquad \text{Money supply} = \text{monetary base} \times m

(a)

Using a money market , explain how a reduction in the CRR can stimulate economic activity even when the repo rate is being raised simultaneously. [4 marks]

(b)

Evaluate the potential conflicts and complementarities of using a higher repo rate and a lower CRR simultaneously as monetary policy tools. [6 marks]

Solutions

Questions 3-228

Unlock these questions with Premium

That's every free question here — 2 of 228.

+226 more questions, plus Mock Papers & Worksheets, are waiting in Premium.

Upgrade