Question

The President of Ghana launched the COVID-19 business alleviation program in collaboration with the National Board for Small Scale Industries (NBSSI), Trade Associations, and some selected banks. Under the program, the government is giving funds without interest to selected financial institutions for onward lending to businesses at a 3% interest. The program is aimed at helping beneficiaries to sustain their businesses during the Covid-19 pandemic. Use this information to answer the following questions.

a. Explain in your own words, the monetary policy tool being used by the government under this program.

b. If the government had pegged the interest rate under the program at the monetary policy rate, will this have been a better way of setting the rate? Explain the advantages and disadvantages of each scenario

c. Explain the expected impact of the low-interestrate programon gross domestic product (GDP), articulating the possible pathways.

Answer 1

a. The monetary policy tools that is being applied here is increasing the money supply to the businesses by reducing the interest rates, or in this case, eliminating the interest rates altogether. This is the method that is being used to boost the level of production in the economy, and no interest rate would greatly encourage investments and hence, create more employment and also more income in the economy.

b. Pegging the interest rate to the monetary policy rate would have increased investment too, but not as much as it will increase if the interest rates are kept at zero. The advantage of a pegged rate would be the following:

- it would enable some stabilization and some control over the amount of money that is released into the economy.

- it would prevent the sector from entering the liquidity trap which happens when the interest rates are close to zero, and this is the elastic part of the money demand curve where no matter how low the interest rates are, the money demand does not increase and hence, the money in circulation in the economy does not increase

The disadvantages can be as follows -

- if the interest rates are fixed at the monetary policy rates, then the commercial banks would still push to earn from the loans that they give out and this would reduce the amount of loans that investors borrowed

- This would also not serve the adequate purpose of encouraging the businesses to prosper as loans would still be expensive to them

c. The low interest program will increase government spending, which is one of the prerequesits to bringing a country out of recessionary phases. This will create more investment, which will increase more jobs, increase income and hence increase aggregate demand which will again increase output. Hence, the GDP of the country will also increase.