EC140 Lecture Notes - Lecture 12: Redistribution Of Income And Wealth, Output Gap, Core Inflation

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4 Apr 2016

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EC140 Full Course Notes

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One soluion is to ignore the money supply and target interest rates directly. Agree to pay interest or lend money at a set interest rate they determine market interest rate. Diicult to know the slope/posiion of the money demand curve. Diicult to know when the money demand curve will shit. Diicult to control the money supply banks can change target reserve raios. If the bank targets money supply, interest rate will luctuate. If the bank wants to target interest rates, it can do so much easier directly. Target the overnight interest rate (rate charged between banks) Announces a rate 0. 25 percent points above the overnight rate. Banks have an incenive to set their overnight rates close to the target. Sells/buys government securiies to ensure that the supply/demand for money from banks keeps interest rates stable. Money supply depends on decisions by banks and individuals in response to the target interest rate. Boc chooses to set policy to afect the economy.

Related Questions

Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply? How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment? Why might monetary policy fail? What does inflation targetingmean?

skypanda530

Which of the following can help to explain why higher inflation may lead to currency appreciations?

(a) The interest rate is not the prime target of monetary policy.

(b) Most central banks adjust their policy interest rates expressly so as to keep inflation in check.

(d) Inflation will increase the purchasing power of a currency.

(e) The world market does not adjust their currency trade to reflect inflation

True, False, or Uncertain

Explain why each of the following statements is True, False, or Uncertain according to economic principles. Use diagrams where appropriate. It is the explanation that is important.

A6-5. The increased availability of credit cards has resulted in an increase in the money supply.

A6-6. An economy that is open to capital flows has two channels for the monetary transmission mechanism, while an economy closed to capital flows has only one. [Hint: Explain in the context of an increase in interest rates in both types of economies.]

A6-7. A central bank trying to increase interest rates can do so without decreasing the money supply.

A6-8. When an economy goes into recession, a central bank that is interested in targeting inflation should pursue an expansionary monetary policy

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EC140 Lecture Notes - Lecture 12: Redistribution Of Income And Wealth, Output Gap, Core Inflation

EC140 Full Course Notes

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