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ECON 1020 (99)
Lecture 81

ECON 1020 Lecture 81: Lecture 81

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ECON 1020
Ryan A.Compton

o982 Two key advantages over fiscal policy: o 1. Speed and flexibility o 2. Isolation from political pressure Problems and Complications: Monetary policy has certain limitations and faces realworld complications o 1. Lags (time for investment, aggregate demand, etc to respond) o 2. Cyclical asymmetry effect of raising rates in terms of investment, may differ from the response to lowering rates (high effect on consumers) There isnt a 1 for 1 when increasing or decreasing interest rates for investment 3. Liquidity trap when you keep lowering interest rates, but people dont respond Even when interest rates are very low, people dont invest when in bad recession, etc Inflation Targeting: Increased transparency of monetary policy and accountability Monetary Policy and the International Economy: Effect foreign sector Net exports effects reinforce monetary policy Net exports = exports imports Together they depend on the exchange rate Exchange rate depends on interest rate Expansionary monetary policy: Problem: recession, slow growth o Expansionary monetary policy (lower interest rate) o Decreased foreign demand for dollars o Dollar depreciates
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