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9. In May 2020 Monetary policy Commitee in Turkey has decided to reduce the policy rate...

9. In May 2020 Monetary policy Commitee in Turkey has decided to reduce the policy rate from 8.75% to 8.25%. How this decision may affect credits and capital flows in Turkey ? Explain your answer.

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Answer #1

A lower interest rate in Turkey will make the borrowing cheaper and that will increase the credit flow in the nation and buinsess investors who were not able to borrow at a higher rate will be encouraged to borrow now.

This will reduce the capital flow in the market as return to the foreign investment has decreased in the market and that will reduce the foreign capital inflow in turkey. Overall, the currency will depreciate and with local investment the aggregate demand in Turkey will increase.

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