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.

Foreign direct investment (FDI) flows remain relatively stable in non-mining ventures, particularly in renewable energy sectors such as solar and wind. The government has enacted regulatory changes that encourage private-sector participation in green investments, hoping to lessen reliance on fossil fuels. Analysts predict that over the next decade, renewable energy might comprise up to 30% of Chile’s energy mix, helping the country manage environmental externalities while sustaining long-term economic growth.

Despite Chile’s liberalized trade regime, some domestic industries face competitiveness hurdles from global market fluctuations. The peso’s exchange rate is influenced by copper prices. Therefore, this has spurred officials to pursue greater diversification.

Income distribution remains a topic of debate. Chile has recorded improvements in its Gini coefficient over the past decade, yet inequalities persist—especially in rural areas where access to education and healthcare lags behind that in urban regions. Government initiatives to raise the minimum wage and invest in vocational training signal attempts to address income disparities, which some critics argue need more comprehensive policies.

Private enterprise plays a central role in Chile’s leading export industries. In the mining sector, large multinational firms partner with domestic companies, creating jobs and contributing to government revenue. Nevertheless, critics point to environmental costs from mining activities and the need for stricter regulations to ensure sustainable resource use. Many also question whether enough investments are being channeled into non-traditional sectors like technology and advanced manufacturing—areas widely seen as key to sustainable future growth.

Moving forward, Chile’s policy landscape continues to evolve. Discussions about strengthening social safety nets, investing further in green energy, and maintaining a competitive exchange rate occupy center stage. The government’s approach to promoting inclusive development includes balancing social spending with structural reforms that attract both domestic and foreign investors. Ultimately, Chile’s ability to diversify its economy beyond copper and ensure equity across various regions will determine its long-term path to stable and inclusive growth.

Table 1: Chile’s Macroeconomic Indicators (2019–2022)

Table 2: Chile’s Export Composition (2022)

Serbia is a country located in Southeastern Europe with a population of approximately 6.9 million. Its official currency is the Serbian dinar (RSD). According to official estimates, Serbia’s nominal GDP in 2022 reached US$65.2 billion, growing from US$63.5 billion in 2021. The unemployment rate stands at 9.8%, although it can be higher in rural areas. Inflation in 2022 averaged about 11.5%, driven partly by increasing energy prices.

Serbia is well-known for its agricultural output—especially raspberries, where it ranks among the top producers in the world. Domestically, the government charges a 20% value added tax (VAT) on many goods and services. The personal income tax system has a base rate of 10%, rising gradually for higher income brackets, while corporate income is taxed at 15%. The Gini coefficient stands at 0.35, suggesting moderate income inequality.

Trade is a constant focus of Serbian economic policy. Serbia has strong trade links with the European Union (EU), which accounts for roughly 63% of its exports. Policymakers have debated using expansionary fiscal policy to support economic growth, focusing on infrastructure development and public investment.

Table 1: Selected Macroeconomic Indicators for Serbia (2022)

Table 2: Labour Market Data for Serbia (2022)

Table 3: Domestic Market for Raspberries in Serbia

Figure 1 (not shown) illustrates the domestic demand (Dd) and supply (Sd) for raspberries in Serbia, where the equilibrium price in 2022 was 300 RSD per kg. By early 2023, the price reached 350 RSD per kg as global demand picked up.

Poland has experienced steady economic growth in recent years, supported by a diverse industrial base, significant agricultural production, and growing service sectors. The country is a major producer of apples, exporting large quantities to neighboring European countries. The government imposes several taxes, including value-added tax (VAT) and progressive personal income tax. In 2022, policymakers considered pursuing expansionary monetary policies to stimulate the economy amid signs of a possible slowdown.

Table 1 shows selected macroeconomic data for Poland from 2019 to 2022.

Table 2 outlines Poland’s major tax rates.

Poland’s Gini coefficient stands at 0.305, reflecting moderate income inequality. Estimates suggest that the average marginal propensity to consume (MPC) in Poland is approximately 0.75. Table 3 provides recent data about the Polish apple market.

In 2021, the total export revenue from Polish apples stood at 500 million PLN. By 2022, this figure had risen to 600 million PLN. These trends highlight Poland’s continued importance in the international apple market.

Overvaluation of the NZD

New Zealand’s strong economic performance has led to a surge in the value of its currency, the New Zealand dollar (NZD). The finance minister has expressed concern that the NZD is overvalued by 10–15%, potentially impacting the country’s export sector by making its goods and services more expensive for foreign buyers.

Despite the strong currency, New Zealand’s export sector has demonstrated resilience, adapting to the challenging environment. However, the Reserve Bank of New Zealand (RBNZ) has taken steps to curb inflationary pressures and maintain economic stability. The central bank has raised interest rates four times this year, reaching 3.5%. This tightening of monetary policy aims to keep inflation expectations in check and ensure sustainable economic expansion.

New Zealand’s economy is projected to grow at a robust 3.7% in 2014. The country has also achieved a trade surplus, driven by strong global demand for its dairy products. However, recent declines in dairy prices have moderated export growth, as New Zealand’s dairy exports are a key contributor to the economy.

To address the overvalued currency, the central bank may consider intervening in the foreign exchange market to induce a depreciation of the NZD. A weaker NZD would boost exports by making them more competitive internationally and reduce inflationary pressures caused by expensive imports. By carefully managing monetary policy, the Reserve Bank aims to strike a balance between supporting economic growth and maintaining price stability.

The NZD had been near its record high against the US dollar before weakening last week due to slower inflation figures and a fall in dairy prices. The NZD has gained about 6% so far this year.

An economist recently suggested that the central bank might intervene in the currency market to prevent further appreciation of the NZD.

New Zealand government figures showed a monthly trade (goods) surplus of NZD 247 million in June 2014, compared to NZD 371 million in June 2013. The annual trade (goods) balance shifted to a surplus of NZD 1.2 billion from a deficit of NZD 819 million a year earlier.

Global demand for New Zealand dairy products has been a key support for exports over the past 18 months, though prices have dropped this year due to an increase in global supply.

Table 1: New Zealand’s Trade Data

Table 2: NZD Exchange Rate and Dairy Price Index

Current account deficit poses a challenge to Pakistan’s economy

Pakistan’s president has raised concerns about the increasing current account deficit, which grew to USD 12.12 billion in 2016/17 from USD 4.86 billion in 2015/16. This deficit is driven by rising imports and declining exports. Due to low prices of the imported goods in foreign markets, the president has proposed restricting the import of luxury, non-essential goods through quotas, aiming to mitigate the issue and reduce dependence on external borrowing.

The governor of Pakistan’s central bank supports the president’s concern, emphasizing that excessive non-essential imports contribute to the deficit and require borrowing from abroad. However, he noted that 32% of imports consist of capital goods essential for the growth of small and medium enterprises (SMEs), agriculture, and construction.

Central bank advisors have suggested depreciating the rupee to address the trade deficit. The currency operates under a managed exchange rate system and is estimated to be overvalued by 20%. However, the central bank governor warns of the negative effects of depreciation, such as higher inflation.

Pakistan’s economic growth reached 5.3% in 2016, its highest in a decade, with an estimated increase to 6% in 2017. The government believes that boosting SME loans from 7-8% to 15-17% of total business loans will further enhance economic growth.

In addition to the current account deficit, fiscal policy decisions have led to a budget deficit, increasing public debt to 62% of GDP in 2016. The central bank recommends limiting public debt to 60% of GDP.

Table 1: Pakistan’s Current Account Data

Table 2: Key Economic Indicators