a) Effects on the economy of a policy of high interest rate:

1. Reduces borrowing:
   High interest rates make borrowing more expensive for businesses and consumers, leading to a reduction in overall demand for loans.
2. Decreases investment:
   Businesses are likely to cut back on investment in new projects due to the higher cost of borrowing, which can slow down economic growth.
3. Encourages savings:
   Higher interest rates incentivize saving as people earn more from their savings, reducing consumer spending.
4. Reduces disposable income:
   For those with variable-rate loans, higher interest rates mean higher loan payments, reducing the amount of disposable income available for spending.
5. Discourages inflation:
   By dampening demand, higher interest rates can help control inflationary pressures within the economy.

b) i) Agency problem within a limited liability company:

The agency problem refers to a conflict of interest where company management (agents) may act in their own interests rather than in the best interests of the shareholders (principals). This can lead to decisions that do not maximize shareholder value.

ii) Causes of the agency problem:

1. Divergence of interests:
   Managers may prioritize personal benefits such as job security, higher compensation, or perks over the goal of maximizing shareholder value.
2. Risk aversion:
   Managers may avoid risky but potentially profitable investments because they fear the consequences of failure, even though shareholders may prefer higher-risk, higher-reward projects.

iii) Remedies to the agency problem:

1. Managerial compensation:
   Aligning managers’ incentives with shareholders’ interests through performance-based compensation, such as bonuses or stock options, can motivate managers to work towards maximizing shareholder value.
2. Shareholder control:
   Shareholders can exert influence over management decisions through voting rights and active participation in annual general meetings.
3. Threat of dismissal:
   The possibility of being fired for poor performance can incentivize managers to align their actions with shareholders’ interests.
4. Threat of takeovers:
   The potential for a takeover, where underperforming managers may be replaced, serves as an external control mechanism ensuring management acts in the best interest of shareholders.

c) Why share price maximization is preferred to sales maximization:

1. Focus on profitability:
   Share price maximization inherently considers profitability, whereas sales maximization may prioritize revenue without considering the costs involved.
2. Reflects market value:
   Maximizing share price aligns with increasing the overall market value of the firm, benefiting shareholders directly.
3. Incorporates risk:
   Share price maximization takes into account the risks associated with business decisions, unlike sales maximization, which may overlook potential downsides.
4. Long-term growth:
   A focus on share price encourages long-term strategic decisions that support sustained growth and stability, rather than short-term sales spikes.