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. (7.5 Marks)

c. Explain the expected impact of the low-interest rate program on gross domestic product (GDP), articulating the possible pathways. (7.5 Marks)

Answer 1

a. In order to provide stimulus to the economy, increase consumption and encourage investment spending, the govt is lending money to the bank free of interest, this is to encourage banks to lend out more. A 3% interest rate charged on loans taken by businesses is also lower than the interest rate that is normally charged. This is to allow investors to get credit at lower interest rate and not hault investment. This is to increase economic output.

b. Pegging the interest rate under the program would not have been a better policy in these circumstances.

c. Low interest rate reduce the cost of borrowing and make investments attractive. As the demand for investment increases, output in the economy increases. this comes from the equation: AD= C+I+G+NX

Investments have a positive relationship with aggregate demand. and in equilibrium, total demand is equal to the output ie AD=Y

so output is expected to increase when govt cuts interest rate