Gce Model Questions Vol1 2024 Economics Question 8

Country Z’s central bank initially operates with a reserve requirement of 10 %, a discount rate of 5 % and holds government securities worth ₦2,000 bn. The monetary base (MB) at that time is ₦500 bn. Assume the simple money multiplier is m = 1 / reserve‑requirement. The bank then implements the following policy mix: 1. Raises the reserve requirement to 12 %. 2. Reduces the discount rate to 4 %. 3. Conducts an open‑market sale of ₦200 bn of government securities. Assume the open‑market sale reduces bank reserves by the same amount, thereby lowering the monetary base. Answer the questions below. (a) Calculate the new money multiplier and the new money supply after the policy changes. (b) Using the LM curve framework, explain the likely effect of the change in money supply on the equilibrium interest rate. (c) Within the IS‑LM model, discuss the expected impact on national output and the price level. (d) Identify two transmission mechanisms through which the policy mix influences the economy and discuss one possible trade‑off that the central bank may face between price stability and exchange‑rate stability.