W10 - Monetary Policy

Question 1

IS curve

Answer 1

Investment saving, Demand
- Y = A - xr
- downward sloping

Question 2

Ir curve

Answer 2

Interest rate saving
r = rcb
- central bank

Question 3

Keynesian Phillips curve

Answer 3

π =πe + k (y-y) + u
-π inflation,
- (y-y) = output gap
- u = cost push shock

Question 4

Strict inflation targetting

Answer 4

Central banks announce target 2%, needs
to be kept
- higher interest rates = reduce output
- engeniers recession

Question 5

Flexible inflation targetting

Answer 5

Inflation is primary objective but growth + unemployment is secondary
- deviation from target premitted but not corrected immediately
- avoids recession

Question 6

How are interest rates set in practice

Answer 6

by a committee of 9 members - BofE

Question 7

What did John Taylor suggest and positives

Answer 7

Scrapping committes and replace individual judgement with rule for setting interest rates
- Predictable
- Transparent
- Avoids human error

Question 8

Taylor rule

Answer 8

Taylors : r cb = 4 + 1.5(π-2) + 0.5 (Y-Y*)

Question 9

Zero lower bound

Answer 9

Inability to set a negative interest rate, as r = 0 encourages hording of currency, liquidity trap, deposits exit, no loans

Question 10

Ways to beat zero lower bound

Answer 10

a) Price level targeting - Keep CPI on target path, but doesnt eliminate problem

b) Taxing currency - Gesell tax (stamping currency - not convienent), Implicit tax of altering exchange rates, get rid of cash