Turkey Hikes Interest Rates to 15%

EconEye Admin

3 years ago

Turkey’s central bank almost doubled interest rates to 15%. Annual consumer inflation has come down from 85.5% in October but was still 39.6% in May. The lira weakened further after Thursday’s rate hike news, dropping more than 2% to a new record low of 24 to the US dollar.—cnn.com

Answer the following questions to check your understanding of the story.

1) What can Turkey’s central bank hope to achieve by raising interest rates?

Turkey’s central bank can hope to achieve ______________.

a) a lower foreign exchange value of the lira

b) an increase in consumption expenditure and investment

c) lower unemployment in the short run

d) lower inflation

Wrong! - How does a rise in the interest rate influence the foreign exchange value of the lira, consumption expenditure, and investment? Does unemployment rise or fall? Does aggregate demand increase or decrease? How does the inflation rate change?

Good Job! - When Turkey’s central bank raises interest rates, consumption expenditure and investment decrease, aggregate demand decreases, and the inflation rate falls.

2) What is the Taylor rule, and with Turkey’s economy at full employment, is the increase in Turkey’s interest rate consistent with it?

The Taylor rule is a rule that sets the policy interest rate to __________ the inflation rate and Turkey’s interest rate __________ consistent with the Taylor rule.

a) exceed; is not

b) equal; is not

c) exceed; is

d) equal; is

Wrong! - What is the Taylor rule? If Turkey’s central bank uses the Taylor rule, what does the policy interest rate equal?

That's Right! - The Taylor rule sets the policy interest rate at 2 percent a year plus the inflation rate plus one half of the deviation of inflation from 2 percent a year, plus one half of the output gap. If the actions of Turkey’s central bank were consistent with the Taylor rule, then it would need to set the interest rate much higher than 15%.

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