2020 IB Extended Essays

-Analysis of the Reason behind the Difference In Result

To further measure how the monetary policy impacted the two countries and the difference between them, the multiplier is taken into consideration. The concept of the multiplier allows the inclusion of a numerical value to measure the extent of how an endogenous variable changes in response to a change in an exogenous variable. (Jocelyn Blink, 2012)For this instance, the endogenous variable is the currency value and the exogenous variable are the interest rates. The number obtained showcases a value of how effective the policy was. However, since both Turkey and the UK utilised a contractionary monetary policy, the measured value will be a reverse multiplier. Furthermore the multiplier also has a chain of determinants leading to its final value. The two main factors are the marginal propensity to consume (MPC) and the marginal propensity to save (MPS). These two factors are impacted by several economic indicators such as, GDP, inflation, interest rates, business cycle and population pyramids. These determinants impact how people react to a change in interest rates via their consumption and saving propensities. (Jocelyn Blink, 2012) Firstly, the difference in GDP. As mentioned before, the UK’s GDP growth rate was much higher than Turkey’s as they had a rate of “0.2” compared to Turkey having a rate of “-.2.8”. Given the fact that consumption is a factor of GDP, The GDP value would have large impact on the Marginal Propensity to Consume and Save. A higher GDP generally demonstrates higher consumption. Therefore, the UK would have more difficult time than Turkey to experience a reverse multiplier effect hence a lower currency appreciation. Furthermore directly related to the GDP value, MPC and MPS value also greatly depend on the position of the economy on the business cycle as well. (LIOUDIS, 2019)

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