Answer to Question #291225 in Microeconomics for siyad

Question

Answer True or False, then justify your response with practical economic examples:                       

a.   The introduction of mobile money transfers and ATMs has reduced the demand for money tending to lower interest rates.                                                                     (5 marks)

b.   Open Market Operations are more effective in a developing country like Kenya when compared with the Bank Rate Policy.                              (5 marks)

c.   Since Quantitative credit control instruments are more targeted and more objective, it is always advisable that they be applied at all times over the Selective instruments.                                                         (5 marks)

d.   Inflation is always associated with more money chasing few goods.

Answer 1

a.   

False

Mobile money transfers and ATM introduction, facilitated the emergence of e-money, which in turn increases the demand for money in the economy. Such, reduces monetary policy effort to effect price stabilization in the economy, resulting to higher interest rates in the long-run. (Mawejje & Lakuma, 2019)

b.

True

Developing nations have the disadvantage of existing disorganized money markets that offer an assortment of money rates, rendering bank rate policy ineffective. Open market operations on the other hand, play a fundamental role in managing liquidity within economies of developing nations making it a more convenient way to apply monetary policies

c. 

True

The quantitative control measures work towards credit volume regulation within banking systems, making it more effective compared to the qualitative which rather works to regulate just the flow of already existing credit volume. (Barik, 2020)

d.   

False

In the case of a cost push inflation, where cost of production and transportation rise, production within the economy reduces, lowering GDP of the economy, as the equilibrium point drifts backwards and higher. In this case, firms will start laying off, to keep up with production costs. As a result, volume of money supply falls, even though the situation is just temporary. (Machlup, 2020)

 

Reference.

Mawejje, J., & Lakuma, P. (2019). Macroeconomic effects of Mobile money: evidence from Uganda. Financial Innovation, 5(1), 1-20. https://doi.org/10.1186/s40854-019-0141-5

Barik, K. (2020). Unit-6 Monetary policy. Indira Gandhi National Open University, New Delhi.

Machlup, F. (2020). Another View of Cost-Push and Demand-Pull Inflation. In Economic Semantics (pp. 241-268). Routledge.