Book 1_Econ_MONETARY POLICY

Question 1

Key roles of central banks

Answer 1

Sole supplier of currency
Banker to the government and other banks
Regulator and supervisor of payments system
Lender of last resort
Holder of gold and foreign exchange reserves
Conductor of monetary policy
control inflation so as to promote price
stability

Question 2

some central banks have other stated goals:

Answer 2

Stability in exchange rates with foreign currencies
Full employment
Sustainable positive economic growth
Moderate long-term interest rates

Question 3

monetary policy tools

Answer 3

Policy rate
Reserve requirements
Open market operations

Question 4

The monetary transmission mechanism: Increase policy rate

Answer 4

• Banks’ short-term lending rates will increase
• Bond prices, equity prices, and asset prices in general will decrease
• Both consumers and businesses may decrease their expenditures because their expectations for future economic growth decrease.
• The increase in interest rates may attract foreign investment in debt securities, leading to an appreciation of the domestic currency relative to foreign currencies

Question 5

qualities of effective central banks

Answer 5

Independence
Credibility
Transparency

Question 6

Central bank targeting

Answer 6

• In the past: Interest targeting
• Current: The most common is inflation targeting
• Some: Exchange rate targeting

Question 7

Reasons that monetary policy may not work as intended:

Answer 7

• Inflation expectations, long-term interest rates move opposite to short-term interest rates.
• Hold greater cash balances without a change in short-term rates (liquidity trap)
• Banks may be unwilling to lend greater amounts, even when they have increased excess reserves.
• Short-term rates cannot be reduced below zero.

Question 8

Monetary Policy in Developing Economies

Answer 8

• undeveloped financial markets,
• rapid financial innovation,
• and lack of credibility
  of the monetary authority.