IB Economics 3.5 Demand Management - Monetary Policy Questionbank

Nepal is a landlocked country in South Asia with an estimated population of 29 million. Agriculture remains central to the economy, accounting for about 27% of gross domestic product (GDP) and employing a sizeable proportion of the workforce. However, the country also relies heavily on tourism and remittances from migrant workers abroad, which make up more than 25% of Nepal’s total GDP. Nepal has been seeking to diversify its economy through foreign direct investment (FDI) in energy, infrastructure, and services.

In 2020, Nepal’s GDP stood at US$29.3 billion. By 2021, it had increased to US$30.5 billion, partly due to post-pandemic economic recovery and continued growth in the tourism sector. Official unemployment figures in Nepal are relatively low, but underemployment remains a major issue, especially in rural areas. The country’s Gini coefficient is estimated at 0.32, indicating moderate income inequality, though rural–urban disparities still persist. Nepal’s tax system includes both direct and indirect taxes; the highest marginal rate for personal income tax is approximately 30%.

The tourism sector is vital. Trekking permits, especially for the Annapurna, Everest, and Langtang regions, represent a key source of government revenue. Due to recent changes in permit fees and fluctuations in tourism numbers, local businesses have experienced varying levels of income from trekking-related services.

Table 1: Labour market data in Nepal (2021)

Table 2: Trekking permit data for Nepal

Recent Economic Trends in Chile

Chile, located along the western coast of South America, is widely regarded as one of the region’s most stable and prosperous nations. With a population of around 19 million, the country boasts a successful track record in macroeconomic management, marked by consistent economic growth and relatively low government debt levels. However, ongoing shifts in global trade, fluctuating copper prices, and recent policy reforms have brought new challenges to Chile’s economy.

In 2022, Chile recorded an average monthly wage of approximately US$600, though the cost of living in major urban centers such as Santiago continues to rise. To maintain price stability, the Central Bank of Chile has long operated an inflation-targeting regime, typically aiming for annual inflation close to 3%. Yet external pressures—like disruptions to global supply chains—pushed the inflation rate up to 7.2% in 2022. Unemployment remains a pressing issue; following a peak of 10.7% in 2020 when economic activity contracted, joblessness has gradually declined as the economy recovers.

Chile’s economic identity is strongly tied to mining, particularly copper, which accounts for a significant proportion of export revenues. In 2022, approximately 45% of total exports came from copper and other minerals. While copper has been a major driver of economic growth, economists and policymakers increasingly emphasize diversification to protect against commodity price volatility. The government has also expanded support for agricultural and service industries, promoting increased global competitiveness through various trade agreements with North American and Asian partners.

On the fiscal side, Chile historically prided itself on low government debt, yet debt levels have slowly risen to 37% of GDP by 2022. This reflects higher spending on social programs, including public healthcare and education subsidies. Policymakers are attempting to strike a balance between prudent fiscal management and ensuring equitable access to basic services. In the microeconomic arena, Chile introduced an excise tax on sugar-sweetened beverages to discourage unhealthy consumption and reduce negative externalities tied to rising obesity rates.

Recent Economic Developments and Policy Initiatives in the United Kingdom

Over the past few years, the United Kingdom has experienced profound structural changes and economic challenges. The combined effects of global shocks and post-Brexit transitions have resulted in fluctuating economic growth rates. Between 2019 and 2020, growth fell sharply from 1.5% to –9.8%, rebounding to 7.4% in 2021 as consumer demand recovered. However, inflation accelerated in 2022, surpassing 9% according to official statistics, driven partly by higher energy costs and supply chain disruptions. In response, the Bank of England pursued a more restrictive approach to its monetary policy, raising interest rates multiple times in an effort to contain inflation. While these measures helped temper price pressures, they also increased borrowing costs, posing potential risks to investment and household spending.

In the microeconomic arena, government interventions have focused on mitigating the impact of rising energy costs on households. A temporary energy price guarantee scheme was introduced in late 2022, aimed at capping per-unit gas and electricity fees. This measure, designed to protect consumers, has substantial fiscal implications, as it expands government expenditure. Meanwhile, the government has also debated altering the structure of income taxes, exploring higher income tax thresholds to offset some cost-of-living pressures. Critics argue that such policies may not sufficiently protect marginalized households, especially those affected by wage stagnation and increasing rent costs.

International trade policies have been another focal point of debate. As the UK seeks new markets beyond Europe, the government has been negotiating deals with countries like Australia, Japan, and the United States. One contentious aspect is whether the UK should maintain or eliminate an agricultural quota on poultry imports from certain trading partners. Businesses in the food sector expect that removing such quotas will reduce input costs. However, domestic producers worry about intensified foreign competition. Britain’s trade balance remains in deficit despite recovering exports in advanced manufacturing, pharmaceuticals, and financial services. In 2022, net exports improved slightly due to a weaker pound, but overall trade volumes remain below pre-2019 levels.

Solana is an emerging agricultural economy in Southeast Asia with a population of approximately $35$ million. While the country has successfully industrialized its urban centers, the rural regions remain heavily dependent on rice cultivation, which provides employment for nearly $40\%$ of the labor force. Rice is not only a dietary staple but also a culturally significant commodity. However, Solana's domestic rice farmers face significant pressure from large-scale exporters in neighboring countries, where production costs are lower due to favorable climates and advanced irrigation technologies.

In recent years, the Solanian government has prioritised food security and the protection of rural livelihoods. To achieve this, they have moved away from free trade in the rice sector. In $2023$, following a period of high import volumes that depressed local prices, the Ministry of Agriculture introduced a strict import quota on rice. This policy aimed to stabilize domestic prices and encourage local production, though it sparked debates regarding its impact on urban poverty and international trade relations.