Reference no: EM133377620

Case: Read the scenario below and answer the questions posed in well composed, thoughtful paragraphs. Ensure that you integrate course material into your response and take time to edit your work for clarity.

Some economists have predicted that Indonesia will have the 4th largest economy in the world by 2030. As a result Dany in the financial press have begun to take a closer look at the country, and the management of the econorry by Bank Indonesia (the country's central bank).

Bank Indonesia has an inflation target of 2-4 percent. Last month Bank Indonesia reported that core inflation was 3.27%. The inflation picture across the country is inconsistent. Some cities have reported inflation of 7.78% whereas other parts of the county have experienced more mild rates of 3.23%.

Much of the in country price increases are the result of higher transportation (oil) and food import costs, resulting in headline the consumer price index (CPI) growth of 5.28%.

Question 1. What action do you think Bank Indonesia should take with regard to interest rates? Why is this the case?

Question 2. Given that much of the price growth is due to import costs, what action could Bank Indonesia take in the FX market to affect the value of the Indonesian Rupiah. The Rupiah currently trades at 1 CAD = 11365 IDR.