Question one.

For this question, refer to the Bank of Ghana's Monetary Policy Committee Press Release of March 18, 2020.

a) In ordinary language, explain the meaning of monetary policy. What is the difference between monetary policy and fiscal policy?

b) Explain the difference between monetary loosening and monetary tightening.

c) According to the statement, the MPC reduced the monetary policy rate by 150 basis points. Does this constitute a monetary loosening or monetary tightening? Explain

d) When deciding whether to tighten or loosen monetary policy, central banks weigh the relative risks to price stability and growth. Mention two indicators that the MPC use to gauge the risk to inflation and two indicators the MPC use to gauge the risk to growth.

e) Based on the information in the Press Release, in the thinking of the MPC did the risk to growth outweighed the risk to inflation or vice versa? Refer to specific points from the press release to back up your argument.

f) Using the money market diagram, explain the effect of this policy measure on the real interest rate and real money holdings.

g) In ordinary language, explain how the reduction in the Monetary Policy Rate will help the relative risk identified in part (e) above.

h) In addition to the reduction in MPR, the MPC also reduced the Primary reserve requirement from 10% to 8%. Explain how this additional measure will affect the economy, carefully explain the channel.

Problem two All else being equal, how would each of the following affect the demand for M1(Narrow money)? The demand for M2 (broad money)? Explain.

a) Home equity lines of credit that allow homeowners to write checks against the value of their homes are introduced.

b) The stock market crashes, and further sharp declines in the market are widely feared.

c) Banks introduce overdraft protection, under which funds are automatically transferred from savings to checking as needed to cover checks.

d) A crackdown reduces the illegal drug trade (which is carried out largely in currency).

Problem three For this problem, refer to the article from the Economist Intelligence Unit titled "Currency rally likely to prove short-lived", that is attached to the questions.

a) The article attributes the fall in the Ghanaian cedi since the 2012 to negative domestic and external factors. The main negative external factor has been the decline in the prices of Ghana's primary commodity exports (cocoa, gold and oil). With the aid of a diagram, explain how the falling commodity prices can lead to a depreciation of the Ghanaian cedi.

b) The article also mentions weak domestic economic management as another cause of the Cedi's depreciation since 2012: "Both the fiscal and the current-account deficits were above 10% of GDP in 2012 ? 13, and it was concerns about the government's financial management, coupled with economic imbalances, that tipped sentiment against the cedi. As the government tried with little success to stabilize the economy, market sentiment soured further".

With the aid of a diagram, explain how weak management of the domestic economy can lead to a depreciation of the Ghanaian cedi.

c) The article identifies the factors that led to the appreciation of the currency in July 2015:"In July the IMF conducted its first review of the programme and praised the government's strong record on meeting revenue and expenditure targets and its progress on reforms including cleaning up Ghana's bloated public payroll and liberalising petroleum pricing to reduce budget subsidies. Around the same time the Bank of Ghana (the central bank) disclosed its intentions to sell more dollars to the market and forecast fresh foreign-exchange inflows in the second half of the year from a planned Eurobond and an annual cocoa sector loan. These events caused a rapid rebound in the currency, which strengthened significantly, slashing its 2015 losses to 7.6%".

Using your diagram from part (b), explain how the Eurobond and an annual cocoa sector loan can lead to an appreciation of the Ghanaian cedi in July 2015.

d) The author of the article believes that the long-term solution to the instability of the Ghanaian cedi is a structural shift of the economy from reliance on primary commodities to "agro-based manufacturing into multiple value-added export products". Explain how this structural shift can bring about stability in the value of the currency.

Problem four The table below contains information extracted from the 6th round of the Ghana Living Standards Survey (GLSS) conducted from September 2012 to September 2013.

Total number of people (15 years and above) 45,697

Q1: Did you do work for pay, profit, family gain or did you produce anything for barter or home use during the last 7 days even if it was for only one hour?YesNo

29,461 11,836 Q2: In the last 7 days were you an apprentice?1YesNo

496 10,340 Q3: Were you temporarily absent from work in the last 7 days or did you have a job, business, or other economic or farming activity that he/she will definitely return to?2YesNo

1,394 7,954

1 This was asked only for those who answered "No" to Q1 2 This was asked only for those who answered "No" to Q1 & Q2

Q4: Were you available for work during the last 7 days or within the next 4 weeks if there had been an opportunity to work?3Yes, last 7 daysYes, but only within the next 4 weeksNo

1,301 160 6,318

Q5: Did you make any effort during the last 7 days or past 4 weeks to find work or start own business?4Yes, last 7 daysYes, prior to last 7 days but in the last 4 weeksNo

419 198 4581 Note: The questions have been slightly altered from the original question form in the GLSS without any material change in the import of the original question.

a) Calculate the number of people who were employed (including those in apprenticeship) b) Calculate the number of people who were unemployed c) Calculate the number of people in the labour force d) Calculate the labour force participation rate e) Calculate the unemployment rate. f) How many discouraged workers are in the economy?

Problem five a) Explain the concept of inflation in ordinary language. How is inflation measured? Provide a formula.

b) Differentiate between disinflation and deflation.

c) Differentiate between core and headline inflation. Which one is the preferred measure of inflation by central bankers and why?

For the rest of this question, refer to Table 1 below

Table 1. Chain-linked CPI series Month CPI Month CPI Month CPI

Oct-17 96.503 Aug-18 102.891 Jun-19 109.967

Nov-17 97.384 Sep-18 102.988 Jul-19 110.352

Dec-17 98.376 Oct-18 103.269 Aug-19 110.808

3 This was asked only for those who answered "No" to Q1, Q2 & Q3 4 This was asked only for those who answered "Yes" to Q4

Jan-18 99.766 Nov-18 103.532 Sep-19 110.774

Feb-18 100.000 Dec-18 104.079 Oct-19 111.235

Mar-18 100.394 Jan-19 105.631 Nov-19 111.978

Apr-18 101.081 Feb-19 106.094 Dec-19 112.303

May-18 101.647 Mar-19 106.948 Jan-20 113.896

Jun-18 102.293 Apr-19 107.606 Feb-20 114.360

Jul-18 102.662 May-19 108.780 Mar-20 115.310

Source: Ghana Statistical Service

d) What is the base month for the CPI series? What does a CPI below 100 imply?

e) Calculate the inflation rate for March 2020.

f) How much goods and services will GHC2000 in January 2020 buy in October 2017.

g) Suppose in March 2018 you gave your friend a loan of GHC3,000 to be paid at the end of March 2019. What interest rate should you charge so that the total amount your friend pays back equals exactly the GHC3000 you lent him/her in real terms? Imagine that your friend does not understand the concept of interest rate and simply wants to know how much he should pay you back in total. How much will it be?

ATTACHED