Global Emerging Markets Case Study

1. A

1. Bank of England is undertaking expansionary monetary policy. Bank of England has been

trying to increase the money supply (M2).

Due to the following reasons :There is high un-employment rate (8.3% -Exhibit 7) and inflation is not so around the expected

levels (from the Consumer prices chart-Exhibit 5).

Economy is not performing well (exhibit 6) . GDP growth % is very less. Also, during first 2

quarters of 2012 UK was in recession.

British banks has huge debt levels contain toxic assets from poorly performing Euro zone

countries. So banks in UK are facing liquidity stress due to this condition.

Since the interest rate is very low(0.5) there is not way to decrease that.

So Bank of England is extending its quantitative easing program by buying more government

bonds.

The Fiscal policy is already restrictive. Despite continuing austerity measures the budget deficit

of UK is still huge.

2. The expansionary monetary policy will increase the money supply and hence lower the interest

rate(r ) .

Since Interest rate is lowered, this should help increase in investment and consumption,

which should stimulate the demand side of the economy and increase production (Y).

Lower interest rate (R ) will make the UK assets less attractive hence there will be more outflow

of capital . The latter action will put downward pressure on the Pound. The latter will contribute

to the increase in net exports and reduce the current account deficit.

3.

• The LM curve shifts out (to the right), for a given IS curve.

• The CF curve does not shift in the second pane, but the lower interest rate from the first pane

gives way to more capital outflows.

• In the third pane, the increase in CF leads to a lower exchange rate (foreign currency per

pound) and an increase in NX.

1.B

1. As the housing prices continue to fall, the demand itself in the UK is reducing . Until the demand

picks up there wont be a sustained growth in GDP. Since there is no demand ,...