The government of country X is planning to increase the interest rate to control money supply in itscountry.a. Identify the correct type of monetary measure undertaken by the government of country X byshading the box given below.i. Contractionary Monetary Policyii. Expansionary Monetary Policy(1 Marks)b. Explain the effect of the increase in interest rate on saving and investment of the citizens ofcountry X.
Question
The government of country X is planning to increase the interest rate to control money supply in itscountry.a. Identify the correct type of monetary measure undertaken by the government of country X byshading the box given below.i. Contractionary Monetary Policyii. Expansionary Monetary Policy(1 Marks)b. Explain the effect of the increase in interest rate on saving and investment of the citizens ofcountry X.
Solution
a. The correct type of monetary measure undertaken by the government of country X is:
i. Contractionary Monetary Policy
The government is using a contractionary monetary policy. This type of policy is used to decrease the amount of money in circulation in an attempt to control inflation.
b. The effect of the increase in interest rate on saving and investment of the citizens of country X can be explained as follows:
When interest rates increase, the cost of borrowing also increases. This means that individuals and businesses are less likely to take out loans for big purchases or investments, which can slow economic growth. On the other hand, higher interest rates can encourage saving, as the return on savings is higher.
So, in summary, an increase in interest rates can lead to a decrease in investment and an increase in savings.
Similar Questions
Expansionary monetary policy involves:Question 23Select one:a.Decreasing money supply and increasing interest ratesb.Increasing money supply and decreasing interest ratesc.Decreasing both money supply and government expendituresd.Decreasing both the government spending and taxese.Decreasing both interest rates and taxes.
Under expansionary monetary supply,a.the economy’s money supply is increased by reducing interest rates,b.the economy’s money supply is reduced by reducing interest rates,c.the economy’s money supply is reduced by increasing interest rates,d.the economy’s money supply is increased by increasing interest rates,
Contractionary monetary policy:Question 33Select one:a.deals with reduced government spending and/or increased taxes.b.results in increased domestic farm prices, export prices, and input prices.c.deals with increasing government spending and/or decreasing tax rates.d.deals with increasing money supply in the economy and/or decreasing interest rates.e.deals with decreasing money supply in the economy and/or increasing interest rates.
uppose there is a policy mix of expansionary monetary policy and expansionary fiscal policy. This combination of policies must cause:Group of answer choicesan increase in the interest rate (i)a reduction in ian increase in output (Y)a reduction in Y
Which of the following policy actions by a country’s central bank would increase the money supply in the economy?a.Raising the interest paid on bank reserves deposited with the central bank.b.Increasing the policy rate.c.Buying government bonds through open market operations.d.Increasing the minimum reserve requirements.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.