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. [Maximum of half a page]

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. [Not more than one-page] (7.5Marks)

c. Explain the expected impact of the low-interest rate program on gross domestic product (GDP), articulating the possible pathways. [Not more than one-page] (7.5 Marks)

Answer 1

A. Fiscal policy is the policy of the government with respect to taxation, public expenditure, public debt and deficit financing....inorder to promote small industries or business, government adopted COVID 19 business alleviation programmes.. As a result they have to provide funds to some selected financial institutions including banks to give loans to business firms at 3% interest rate. In this program, government also adopted monetary policy tools to promote business enterprises and production in the Ghana economy.Government stabilisation policy shows the existence of both monetary and fiscal policies to stabilise the eeconomc growth.

B. If the government can fix the rate of interest at monetary rate, it has both advantages and disadvantages.. If the rate of interest is low or fixed at a lower rate, it reduces the savings of the people and the demand for money increases.. On the other hand, the investment will increase and it increases production and output in the economy... But the lack of savings reduce the banks deposits and adversely affects the credit creation... So money supply will reduce and consequently price falls propertionaly with the money supply... It affects the produces / business firms badly ( excess supply creates loss to the firm). So the government action will have both effects.. Positive as well as negative effect on the economy.

C. The lower rate of interest will increase investment in the economy... Huge investment creates income with the help of multiplier. So that production will goes up and can generate more employment in the economy.. As a result of employment income and consumption of the people increase. Aggregate demand will shift to the right and price goes up.. It promotes producers to produce more... Aggregate supply will shift to the right and output again increases more than double and price will slightly fall...this process will go on and the economy will function smoothly ...GDP of the country will increase as a result of this alleviation programe. These are the expected impact of the lower rate of interest formed by the government of Ghana.