IMF Urges Central Banks to Remain Firm on Inflation

EconEye Admin

3 years ago

World inflation is expected to remain high despite a series of rate rises by multiple central banks. The IMF expects weaker global economic growth in 2024 and projects world inflation next year at 5.8 percent. Returning world inflation to a 2 percent target is expected to take until 2025.—ft.com

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

What role does the “series of rate rises by multiple central banks” play in the IMF’s expectations of weaker global economic growth in 2024?

Rising interest rates ____________.

a) slow growth in consumption expenditure, investment, net exports, and aggregate demand

b) create an excess supply of loanable funds so the real interest rate rises, investment decreases, and aggregate demand decreases

c) lower the inflation rate and the real interest rate, which discourages saving and decreases investment and aggregate demand

d) slow growth in consumption expenditure, investment, and net exports, which slows the growth of potential GDP

Wrong! - What are the ripple effects of rising interest rates?

That's Right! - The ripple effects of rising interest rates include slower growth in consumption expenditure, investment, and net exports, which slows the growth of aggregate demand and real GDP.

Why does the IMF expect the world inflation rate to be above 2 percent until 2025?

a) Inflation cannot be tamed until world economic growth increases.

b) It will take until 2025 to convince all central banks to raise interest rates.

c) Monetary policy is a theory that doesn’t work in practice.

d) Changes in the interest rate operate with a long lag.

Wrong! - The news clip states that multiple central banks have raised interest rates. Why does it take time for the inflation rate to fall?

Correct! - The news clip states that multiple central banks have raised interest rates, but interest rate changes operate with a long lag. The effects on the inflation rate take even longer than changes on the real GDP growth rate.

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