Recently the economic conditions of the country have been weakened. Even though inflation has not increased in the last year. Price of crude oil on the international market has increased by 15% last month. As a measure in controlling inflation in the country, the Monetary Policy Committee (MPC) of the Bank of Ghana has decided to restrict the supply of money and increase the target policy rate by 100 basis points (1%):
a. As a finance student, do you support the decision made by the monetary committee? Explain (not exceeding 6 lines of explanation).
b. Explain how prices of debt securities would change in response to this policy? (not exceeding 6 lines of explanation)
c. Assume the Monetary Policy Committee decides to reduce the target policy rate by 1.5% today and this decision is not backed by any financial market expectations. Will this change in policy directive affect yields paid by firms when they issue corporate bonds? Explain your answer.
d. In the last month, the 91day treasury bill rate (risk free rate of return) has increased from 10% to 15% per annum. What are the potential (theoretical) reasons for this large increase?
