Skip to content

IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

A central bank with an inflation target observes that inflation is above target and the economy is at full employment. Which action is consistent with its objective, and what is the typical transmission effect on a life insurer's business?

Raising the policy rate is the consistent action. It increases borrowing costs, slows demand and so reduces inflationary pressure, while yields on new bond investments typically rise, which affects an insurer's reinvestment returns and the pricing of guaranteed products.

  1. ACut the policy rate; bond yields fall and guaranteed product pricing becomes easier
  2. BRaise the policy rate; borrowing costs rise, demand slows, and new bond yields available to the insurer tend to riseCorrect
  3. CBuy government securities in the open market; money supply falls
  4. DLower the reserve requirement for banks; credit contracts
  5. Devalue the currency to reduce import prices

Explanation

Tightening monetary policy by raising the policy rate reduces borrowing and spending, easing demand-pull inflation, and market yields typically rise, so the insurer can invest new money at higher yields. Open market purchases and lower reserve requirements expand money, and devaluation raises import prices.

Did you get it right without looking?

One question tells you little. A timed set on Impact of macroeconomic policies on businesses shows your real accuracy, how long you take and where you lose marks.

Practise Impact of macroeconomic policies on businessesFree diagnostic mock

More Impact of macroeconomic policies on businesses questions