Answer to Question #238501 in Macroeconomics for Comfort

Question

The Bank of Zambia has introduced the monetary policy rate {MPC) initially set at 9.0% and
which has since moved up to 15.5% as of may 2016.
a. What is the purpose of the monetary policy rate and what factors are considered in its
determination? (10 Marks)
b. Discuss the reasons for the introduction of the policy rate, highlighting both the merits
and demerits of this measure. (10 marks)
c. What is the significance of the policy rate in relation to other monetary policy
measures? (10 Marks)
d. Discuss the implications of the increase in the policy rate from 9.0 to 15.5 % on the
financial market and on the Zambian economy in general. What factors may have
prompted the increase and what is the likely direction of the movements in the rate
going into the second half
of 2016? What factors are likely to weigh on the movements?

Answer 1

a.

Monetary policy rate is the basic interest rate set by the central bank or the monetary authority of a country. It is one of the instrument which is used to stabilize the economy and used to increase the liquidation in the market and curb the liquidation in the market.

The main objective of the Bank of Zambia to ensure price stability and promote financial system stability in an economy.

Bank of Zambia introduce Monetary policy rate at 9 % and then 15.5 %

Central bank uses 2 types of monetary policy Expansionary monetary policy and contractionary monetary policy 

Lifting the policy rate from 9% to 15.5 % is known as contractionary monetary policy that means bank wants to reduce the money supply in the market in order to bring down the inflation rate.

Factors which are considered during the determination of the Monetary policy rate or bank interest rate

• Money demand in the market: When money demand in the market for investment is high the interest rate will be high.
• Money supply in the market: If money supply in the market is high then interest rate will decreases.
• Fiscal deficit and government borrowing: Higher the interest rate higher the money demand in market and higher the interest rate .
• Inflation rate: Higher interest rate will lead to high interest rate.
• Global interest rate also affects the monetary policy rate as it encourage global investors and leads to increase in capital flow.

b.

Advantages of the Monetary policy Rate:

• It is quantitative in nature and shows overnight interbank impact and immediate results in the market as compare to other monetary measures which needs some time of the to influence the economy.
• It is flexible and can be used according to the need of the economy as per the price , inflation and market money demand and supply.
• It is more accurate measure as compare to other tool as it has direct impact on borrowing and financial activities of the banks and business in an economy.

It has some disadvantage also:

During the global recession it is very hard to stabilize the economy with only policy rate.

During inflation increase in policy rate will increase the prices of the product. so , for short term it worsen the situation.

Tightening the policy only by policy rate discourages the business activity in an economy which lead problem in economic growth.

c.

when policy rate is implemented with other ensures will have sure positive impacts on an economy.