Turkey Shocks With Big Rate Hike to 25% to Cool Raging Inflation

EconEye Admin

3 years ago

Turkey’s central bank hiked its key interest rate by a surprisingly large 7.5 percentage points to 25%, signaling a new determination to address inflation, which soared to 48% last month. President Erdogan’s past drive to slash interest rates sent inflation above 85% last year.—cnn.com

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

Why does hiking the key interest rate signal that Turkey’s central bank is determined to address inflation?

Hiking the key interest rate ____________.

a) increases investment, increases short-run aggregate supply, and lowers the price level

b) decreases aggregate demand, real GDP, and the price level

c) increases aggregate demand and real GDP, and lowers the price level

d) increases investment, decreases real GDP, and lowers the price level

Wrong! - What ripple effects occur when Turkey’s central bank hikes its key interest rate?

That's Right! - By hiking the key interest rate, Turkey’s central bank signals that they are serious about fighting inflation. A hike in the interest rate decreases the quantity of money and loans, consumption expenditure, investment, aggregate demand, real GDP, and the price level.

Do you expect Turkey’s inflation rate to respond quickly and predictably to the recent change in the key interest rate?

a) We expect the inflation rate to fall only if the key interest rate is set higher than the inflation rate.

b) Monetary policy has developed into an easily predictable economic outcome.

c) The monetary policy transmission process is long and drawn out, and the economy does not always respond in the same way to a given policy change.

d) The hike in the key interest rate increases Turkey’s exchange rate almost immediately, and other ripple effects occur soon after.

Wrong! - Do the ripple effects of monetary policy act with the precision of an economic model or are they difficult to predict and anticipate? Why?

Correct! - The ripple effects of monetary policy are difficult to predict and anticipate. So we can’t expect Turkey’s inflation rate to respond quickly and predictably to the recent change in the key interest rate.

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