Extract E
A few years ago, Norges Bank, the central bank of Norway, was commended for its decisive stance. Following a recovery in global energy markets, Norway’s economy expanded more rapidly than those of its main Scandinavian trading partners. Operating on this strength, Norges Bank progressively raised its policy rate to 2.25% to preempt inflation and cool down the red-hot housing markets in Oslo.
However, some economists argued this tightening cycle was enacted too early. Core inflation remained sticky below the official target of 2.0%, and non-oil sectors were still fragile. Nevertheless, high levels of domestic household debt kept the central bank cautious, maintaining a relatively restrictive posture to ensure financial stability.
By 2023, global economic headwinds and slowing consumer demand forced Norges Bank to aggressively reverse course, cutting the policy rate to historic lows. The efficacy of these cuts remains a subject of intense debate, as stimulating aggregate demand becomes incredibly difficult when real interest rates drop into negative territory. Furthermore, these record-low policy rates triggered a rapid depreciation of the Norwegian Krone (NOK) on global currency markets.
Refer to Extract E. Explain the term 'real interest rates' and analyse why low interest rates may lead to a fall in the value of a currency on the foreign exchange market.
310 exam-style questions on AQA A Level Economics 2.6 The international economy (A-level only), covering 2.6.1 Globalisation, 2.6.2 Trade, 2.6.3 The balance of payments, 2.6.4 Exchange rate systems, and 2.6.5 Economic growth and development. Each one has a worked solution and a mark scheme showing where the marks go.