Inflation and deflation — practice question

Source material: The Swiss economy In 2022, inflation in Switzerland was above the 2% target, but it remained lower than the inflation rates seen in other high-income economies, including the US (9.1%), the UK (11.1%) and Germany (7.9%). Prices are more steady because a mix of microeconomic and macroeconomic policy tools is used. These tools include maximum prices, subsidies and contractionary monetary policy. To boost the output of solar energy, the Swiss Government has given producers more than $500 million in subsidies. This forms part of the government’s strategy to reduce dependence on non-renewable energy sources, most of which are imported. Relying too heavily on foreign markets could make the economy more vulnerable to external shocks. From 2015 to 2022, Switzerland’s current account in the balance of payments has been in surplus. Low inflation, together with the production of very high-quality products, may have helped create this surplus. A strong currency has also helped keep the price of imported raw materials low in Switzerland. The Swiss franc is among the world’s most stable currencies. In periods of economic uncertainty, the Swiss franc normally appreciates. Fig. 1.1 presents the global growth rate (% change in GDP) and the percentage change in the value of the Swiss franc against the USD($), from 2018-2022. Even though inflation was not especially high when compared with other countries, the Swiss central bank raised interest rates in 2022. This was intended to cut inflationary pressures. However, there was a danger that higher interest rates could push unemployment up. The increase in interest rates had a negative effect on some firms. The Swiss Government had to arrange a merger between the two largest banks in Switzerland. This was done to prevent one of them from failing, which would have weakened confidence in the whole banking system. A merger might also have allowed the combined bank to benefit from larger economies of scale. On the other hand, the merger caused some workers to lose their jobs and gave the merged bank greater monopoly power.