Case study The Central Bank is the only institution mandated by government to manage monetary policy. At its Meeting held on November 2223, 2021, the Monetary Policy Committee as reported by the new Bank of Zambia Governor (Dr. Kalyalya), decided to increase the Policy Rate by 50 basis points to 9.0 percent from 8.5 percent. This is in line with the need to continue supporting the economy and maintaining financial stability as the Government embarks on key reforms aimed at restoring macroeconomic stability, economic growth, and uplifting peoples lives. In arriving at this decision, the Committee took into account the following factors: First, actual inflation, which has persistently remained above the 8 percent upper bound of the target range since the second quarter of 2019; Secondly, Inflation projections which indicate that although inflation is projected to decline sharply over the forecast horizon (2021 -2023) due the dissipation of base effects, lagged impact of the appreciation of the Kwacha, and anticipated stronger fiscal consolidation, it will remain above the upper bound of the 6-8 percent target range. Inflation is projected to average 22.6 percent in 2021, decline to 15.0 percent in 2022, and to 9.3 percent during the first three quarters of 2023. Lastly, the need to steer inflation toward single digits by end-2022 and into the target range by mid-2023 as stated in the 2022 Budget Address. Further, the Committee noted that effective implementation of fiscal reforms will significantly complement the achievement of a low and stable inflation objective. Additionally, the central bank Governor reported that, domestic Real GDP grew by 8.1 percent in the second quarter of 2021 against a contraction of 5.9 percent in the corresponding quarter of 2020.Construction, wholesale and retail trade, information and communication, as well as education sectors contributed to the recovery from the world economic meltdown that was brought about by Covid-19 pandemic. For 2021, the economy is projected to rebound, growing by 3.3 percent on the back of strong performance in the agriculture, information and communication as well as wholesale and retail trade sectors (Bank of Zambia MPC November 2021 presentation). Page 3 of 5 Suppose the Zambian economy is open amidst Covid-19 pandemic threats and characterized by the following Behavioral equations. (Hint: all amounts in Billions Kwacha): C = 800 + 0.5 ; Investment(I) = 6,000; Government Spending(G) = 900; Taxes(Taxes) = 600, Transfer payments()= 200, Exports(X)=12,000 and Imports(M)=9,500. In addition, assuming there are no inventories recorded in Zambia between the year 2021 and 2023, and that, the real GDP was ZMW 8.1 billion and ZMW 16.45 billion in 2021 and 2022 respectively. The equilibrium in the goods market shall be when the total demand for goods and services are equal to production (Output).

Question Two (2) Using the case study above, solve for the following variables for Zambia. a) Calculate Equilibrium GDP in the goods market. (Y); Disposable income; Consumption spending (C). (5 marks) b) Using the answers from question (a) above, compute total demand and explain if the calculated total demand is equal to production? (3 marks) c) Assuming that G is now equal to 1,500 billion, solve for new equilibrium output and compare to the new total demand after the increase in government spending. (5 marks) d) Explain with the help of a graph what would happen if autonomous Spending increase by 4000 Million Kwacha. (5 marks) e) Calculate the Zambias economic growth (output growth) between 2021 and 2022. (2 marks) Total marks: 20 marks