IB Economics: Real Life Example, which is as important as Evaluation in Paper 1, 15 marks essay! RLE #2: Monetary policy

For the 15 marks essay of IB Econ paper 1, writing a real life example cohesively and comprehensively is very important not only to prove your understanding and analysis skills of the content, but also to receive the designated marks according to the grading criteria.

In particular, through students' RLE, examiners evaluate whether students have the ability to properly connect and analyse Econ Theory and concepts to actual economic situations.

It all proves the fact that RLE is now an indispensable content in the 15 marks essay and is important enough to determine the level 6 and level 7 essays.

A. Real Life Examples of Expansionary Monetary Policy

1. People’s Bank of China stimulus: In response to the Great Recession, the People’s Bank of China implemented a stimulus package that included a reduction in the reserve requirement ratio for banks, as well as a series of interest rate cuts, in order to stimulate lending and investment.

2. Negative interest rates in Europe and Japan (2014-present): In an effort to boost inflation and stimulate economic growth, the central banks of several European countries, including the European Central Bank, and the Bank of Japan have implemented negative interest rates, which effectively charge banks for holding reserves and incentivize them to lend more.

3. Quantitative Easing (QE) by the U.S. Federal Reserve (2008-2014): In response to the Great Recession, the U.S. Federal Reserve implemented a series of QE programs that involved purchasing large quantities of government bonds and mortgage-backed securities to increase liquidity in the financial system and stimulate lending and investment.

4. European Central Bank (ECB) Long-Term Refinancing Operations (LTRO): In an effort to alleviate the European debt crisis, the ECB implemented a series of LTROs that provided European banks with cheap long-term loans. The program was aimed at increasing liquidity in the financial system and encouraging lending to businesses and households.

5. Zero Interest Rate Policy (ZIRP) by the Bank of Japan: In response to a prolonged period of deflation and economic stagnation, the Bank of Japan implemented a ZIRP that kept the policy rate at or near zero for several years, in an effort to stimulate borrowing and investment.

B. Real Life Examples of Contractionary Monetary Policy

1. Volcker Shock: The Federal Reserve under Chairman Volcker raised the federal funds rate from around 11% in 1979 to a peak of 20% in 1981. The central bank also implemented other measures to tighten monetary policy, such as increasing reserve requirements for banks.

2. Chinese central bank monetary tightening (2017-2018): The People’s Bank of China implemented a range of measures to tighten monetary policy, including raising various market interest rates and increasing reserve requirements for banks.

3. Bank of England (BOE) quantitative tightening (QT): The BOE began QT in 2018, reducing its balance sheet and reversing some of its previous asset purchases. It also signalled that future interest rate hikes were possible, although it did not raise rates before the COVID-19 pandemic hit.

4. European Central Bank (ECB) interest rate hikes (2011-2019): In 2011, the ECB began raising its main policy rate from 1% to a peak of 0.25% in 2014. The central bank also ended its QE program in 2018 and began signalling a normalisation of monetary policy, including future interest rate hikes.

5. Reserve Bank of Australia (RBA) interest rate hikes (2002-2008): The RBA raised its main policy rate from 4.25% in 2002 to a peak of 7.25% in 2008, with several rate hikes in between.