Forbes: Iceland’s Economic Response to Volcanic Threats

Article published: 22 November 2023

IB Economics Syllabus: Macroeconomics (monetary policy, economic stability)

In a striking example of nature’s impact on economic policy, Iceland’s Central Bank has paused its interest rate hike in anticipation of a potential volcanic eruption, as reported by Forbes. This decision, balancing economic foresight with environmental unpredictability, offers a unique insight into the complexities of macroeconomic management in crisis situations. The move is aimed at stabilizing the economy in the face of potential disruptions to critical sectors such as tourism and trade, which are integral to Iceland’s financial health. This scenario vividly illustrates the interplay between environmental events and economic stability, highlighting the challenges faced by economies that are closely tied to their natural landscapes.

IB Economics (IA) Commentary Suggestions:

In your IA, analyze the Central Bank of Iceland’s decision using the Aggregate Demand-Aggregate Supply (AD-AS) model and a monetary policy diagram (money supply diagram). Focus on how halting the interest rate hike serves as a crisis management tool, aiming to stabilize the economy against potential disruptions from the volcanic activity. You could look into the implications for consumer confidence and the broader economic stability, considering the immediate benefits and long-term consequences of this decision. The key concept to focus on in this article is intervention.

Source of image: Getty Images

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