Question

Mock Central Bank in Japan

Part 2: What are the current domestic conditions you think are relevant for deciding what to do with the monetary policy instrument?

Answer 1

The current domestic conditions which are relevant in deciding the course of the monetary policy are. -

1. The tax rates have been increased in Japan in the last quarter os 2019 which has an impact on the economy on the whole.

2. Supply side is on the decline as the high tax rate has reduced the aggregate demand in the economy

3. The coronavirus pandemic has also reduced exports as nations all over the world are in lockdown

4. Lack of economic stimulus is also affecting investment as stock markets are at an all time low

5. Finally, the nation's GDP figures are at a low owing to the lack of economic activity in the country due to the pandemic

In this scenario, the best monetary policy response would be to pump up money supply. This can be done by reducing the intrest rates to induce more investment, reduce the bank's reserve requirements so that more lending is enabled and hence more credit creation in the economy. This will increase aggregate demand in the economy and that will help bring back the macroeconomic variables on track.