12.2: Monetary Policy Flashcards
Open market operations are…
The purchase or sale of bonds by the national central bank to implement monetary policy.
**The bonds traded are usually sovereign bonds issued by the national government.
· Monetary transmission mechanism is…
The process whereby a central bank’s interest rate gets transmitted through the economy and ultimately affects the rate of increase of prices.
What are the main types of Monetary Policies:
· Contractionary
· Expansionary
· Neutral rate of interest
Complete the following:
Neutral interest rate = …
If policy rate … neutral interest rate -> … monetary policy.
If policy rate …. neutral interest rate -> … monetary policy.
Neutral interest rate = real trend rate of economic growth + inflation target
If policy rate > neutral interest rate -> contractionary monetary policy.
If policy rate < neutral interest rate -> expansionary monetary policy.
· Demand shock is a…
· Supply shock is a…
A typically unexpected disturbance to demand, such as an unexpected interruption in trade or transportation.
Typically unexpected disturbance to supply.
· Liquidity trap is a condition in which…
A condition in which the demand for money becomes infinitely elastic (horizontal demand curve) so that injections of money into the economy will not lower interest rates or affect real activity
· Liquidity trap - a condition in which the demand for money becomes infinitely elastic (horizontal demand curve) so that injections of money into the economy will not lower interest rates or affect real activity.
· Automatic stabilizer is a…
A countercyclical factor that automatically comes into play as an economy slows and unemployment rises.
- Fiscal multiplier is…
The ratio of a change in national income to a change in government spending.
- Fiscal multiplier formula:
Fiscal multiplier = 1 / 1 - MPC (1 - Tax rate)
