a) Distinction between Monetary Policy and Fiscal Policy (5 marks)

• Monetary Policy: Managed by the central bank (e.g., BoG), it controls money supply, interest rates, and credit to achieve macroeconomic goals. Tools include policy rates and reserves; focuses on inflation and liquidity. In Ghana, BoG’s Monetary Policy Committee (MPC) sets rates independently per BoG Act.
• Fiscal Policy: Handled by government (Ministry of Finance), involves taxation, spending, and borrowing to influence economy. Aims at growth, employment via budgets. E.g., Ghana’s 2024 budget cut taxes for SMEs post-DDEP.

Distinctions:

• Monetary is indirect (via banks), short-term; fiscal direct (spending), long-term.
• Monetary independent; fiscal political.
• Coordination needed, e.g., Ghana’s 2023 IMF program aligned both for stability.

b) Elements of Monetary Policy with Examples

i. Instruments (5 marks): Tools to implement policy.

• Policy Rate: BoG’s benchmark (e.g., raised to 30% in 2023 to curb 54% inflation).
• Open Market Operations: Buying/selling securities; BoG sells T-bills to reduce liquidity.
• Reserve Requirements: Mandated ratios (e.g., 10% CRR per directive); increased to control credit.
• In Ghana, post-2020, moral suasion guided banks during COVID.

ii. Targets (5 marks): Intermediate goals.

• Money Supply: Target M2 growth (e.g., 15-20% annually to match GDP).
• Interest Rates: Stabilize short-term rates (e.g., interbank at policy rate level).
• Exchange Rates: Managed float for cedi (e.g., interventions to prevent sharp depreciation).
• Inflation: BoG targets 8% ±2% medium-term.

iii. Objectives (5 marks): Ultimate aims.

• Price Stability: Low inflation (e.g., BoG’s 2024 efforts post-DDEP).
• Economic Growth: Support via low rates (e.g., 13.5% in 2021 for recovery).
• Full Employment: Indirect via credit to sectors.
• External Balance: Stable reserves (e.g., building to 3 months imports).
• In Ghana, aligns with Basel principles for financial stability.