Policy Makers The Splitland August-2019
CASE - Chairman of the Central Bank You're the Chairman of the Federal Reserve of Splitland country. Your task is to promote economic growth in Splitland. Make a right decision. Splitland is a developing economy with two distinct regions. The northern region has great investment opportunities, but the people who live there need to consume all of their income to survive. Those living in the south are better off than their northern counterparts and save a significant portion of their income. The southern region, however, has few profitable investment opportunities and so most of the savings remain in shoeboxes and under mattresses.
Task 1: What is the first step you have to undertake in order to develop the financial sector that could benefit both regions and promote economic growth in Splitland?
Task 2: Suppose that a government decides to create a financial market for trading financial securities, and regulate the issuance of financial securities, like stocks and bond, more heavily. Do you think this action will lower or raise economic growth?
Task 3: Immediately after the developing financial system in Splitland. The Central Bank issued treasury bonds with high interest rate and sold them in the financial market for the amount of 120 million $. This action brought insufficiency of money to the commercial banks. What monetary policy actions could and could not be conducted?
Task 4: You realized that trading of securities does not create value for those securities. People, investors, of your country do not buy and sell among themselves. You did not create a financial market for this. What action you have to undertake?
Task 5: Suppose you observe a rise of $120 million in reserves on the liability side of the central bank’s balance sheet with all other liabilities remaining unchanged. In carrying out open market operations, the Central Bank usually buys and sells treasury securities. Suppose your government paid off all its debt. Could the Central Bank continue to carry out the open market operations?
Task 6: You keep money growth constant year after year. In addition, the output is constant. However, when you investigate the country’s inflation rate, you find it to be highly variable. What wrong action you make?