The Bank of Korea (BOK) has signaled that it may accelerate its timeline for raising its benchmark base rate. The Monetary Policy Board observed that keeping borrowing costs at expansionary levels could fuel an overheating economy, driven by a global surge in demand for semiconductor and automotive exports. The central bank projected that South Korea's real GDP could expand at an annual pace of between 6.2% and 7.0%, well above its potential long-run growth rate. Officials expressed concern over supply-chain bottlenecks and labor tightness, which could feed into persistent inflationary pressures.
While domestic small businesses urged the BOK to maintain low rates to support their post-pandemic recovery, the rapid expansion of capital expenditure by major conglomerates and a sharp rebound in household consumption have convinced most market analysts that contractionary policy is imminent.
Using the information in Extract B, write an explanation for the following question.
With the help of an AD/AS diagram, explain why interest rates may need to rise if economic growth rates increase significantly.
222 exam-style questions on AQA A Level Economics 2.2 How the macroeconomy works: the circular flow of income, aggregate demand/aggregate supply analysis and related concepts, covering 2.2.1 The circular flow of income, 2.2.2 Aggregate demand and aggregate supply analysis, 2.2.3 The determinants of aggregate demand, 2.2.4 Aggregate demand and the level of economic activity, 2.2.5 Determinants of short-run aggregate supply, and 2.2.6 Determinants of long-run aggregate supply. Each one has a worked solution and a mark scheme showing where the marks go.