Problem:

(a) What are the main functions of the Bank of Mauritius? Give short comments on each function.

(b) The Repo rate is an instrument of monetary policy for the Bank of Mauritius.

(i) What is the Repo rate?

(ii) In what direction should the Bank of Mauritius change the Repo rate in order to provide a boost to the economy in a period of recession?

(iii) Briefly explain how the above change in the Repo rate is expected to stimulate the economy.

(c) (i) Define the expected real interest rate.

(ii) Why might the actual real interest rate differ from the expected real interest rate?

(iii) Suppose you bought an asset that pays a 7% nominal interest rate, you expect the inflation rate to be 3% and actual inflation is 5%. Determine the expected real interest rate and the actual real interest rate.