Question

Question One
Assuming the government is selling a government bond to fight COVID-19, and at the same time, ASHANTI Goldfields Company is selling a corporate bond to increase its production. Under what conditions will the production-linked corporate bond be over-subscribed at the expense of the government bond. Explore all possible scenarios. [Not more than one-page]
Question Two
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
Examiner: Dr. Edward Asiedu and Dr. Johnson Appiah-Kubi
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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] (7.5 Marks)
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)
Question Three
a. Based on the functions of the banking system, give reasons why governments bail out banks during an economic crisis? [Not more than one-page]
b. Is the World heading for a recession? Explain the conditions under which the world can be classified as being in a recession as COVID-19 persists. Explain linking the pandemic to the various stages of a recession. [Not more than one-page]

Answer 1

Question One

The corporate bond will be over subscribed because in general cases, corporate bonds yeild more returns than government bonds. Even as corporate bonds are riskier than government bonds, people still prefer to take the additional risks for getting the additional returns. This happens when the economy is performing normally. Duirng times of crisis when there is prevalent negative sentiment in the economy, however, people are more inclined to park their excess funds with the government than with private corporates, because it is the safer option as the government can be relied on to give the necessary returns.

Question Two

a.) The monetary policy tool being used here is interest on reserves being zero. The commercial banks have to keep aside a part of their deposits on which the government pays interest. These are kept with the Central Bank. When the government lends money to the banks for free, it is equivalent to the government not paying interest on the reseves and this money can be used by the commercial banks to advance more loans. If this rate 3% is lesser than the interest rates charged on normal loans, then it is useful to believe that this will increase the money supply in the economy.

b.) If this rate was fixed according to the monetary policy rate, then the effect of the move would be lesser, as the commercial banks would still have to pay interest on their borrowings from the government, which would mean the amount of money they borrowed for lending purposes would be less, and less money would be available for circulation in the economy. However, the advantage would be that the government would still have effective control on how much money went into the economy, and it would have reduced government spending as the commercial banks would be more wary of all the loans they approved.

c.) Low interest rates would mean more investment, which would mean more employment and hence more income. This would increase the aggregate demand in the economy and that would increase the national output and employment levels even more. As a result, the GDP of the nation would grow.

Question Three

a.) Governments bail out banks during periods of economic crisis as the banks have a lot of default loans during these times. A lot of poeple are unable to repay their loans due to lost jobs or lower incomes. If the banks do not get their loans back, they will run risk of bankrunptcy, which would mean they will not be able to give back the money they owe to their depositors. If that happens, the economy will be plunged into deeper recession.

b.) The world might be heading for a recession, and that can be said in the following ways -

- There is low consumer demand due to uncertainity about the future prospects

- There is low income of the poeple and more unemployment

- Prices are low as there is no demand in the economy

These are imminent signs of a recession, and the government has to take adequate steps to prevent the same.