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Demand Management (Demand-side Policies) — Monetary Policy · Paper 3 — Free Economics HL Practice Questions

1ChallengeSAQ-LTools of monetary policy (intere7 marksPaper 3~11 min
The Central Bank of Vietnam (SBV) is concerned about rising inflation, currently at 4.8%4.8\% per annum, above its target range of 2–4%2\text{–}4\%. The SBV is considering two policy tools: raising the policy interest rate from 4.5%4.5\% to 5.5%5.5\%, or raising the reserve requirement from 8%8\% to 10%10\%. Commercial banks currently hold 120120 trillion dong in reserves. The reserve requirement is 8%8\% of total deposits. The money multiplier is defined as 1reserve requirement\dfrac{1}{\text{reserve requirement}}. Assume banks are fully loaned up.
(a)
Calculate the money supply (M1M1) and the money multiplier in the Vietnamese banking system. [2 marks]
(b)
Explain how the increase in the policy interest rate from 4.5%4.5\% to 5.5%5.5\% will affect commercial banks' lending behaviour. [2 marks]
(c)
Evaluate whether raising the reserve requirement from 8%8\% to 10%10\% would be a more effective policy tool than the interest rate increase to reduce inflationary pressure. [3 marks]
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Solutions

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