Book: Monetary Policy Summary

Question 1

What is the liquidity trap

Answer 1

The fact that increased money supply no longer decreases the interest rate when it reaches zero

Question 2

How does lower interest rates affect output

Answer 2

It increases with greater consumption

Question 3

What is real, interest rate and borrowing rate

Answer 3

r = i - inflation, the borrowing rate is the policy rate plus risk premium

Question 4

What interest rate affects private policy decisions

Answer 4

Real borrowing rate

Question 5

How does a moneyary expansion affect the exchange rate

Answer 5

It decreases it, increasing output

Question 6

How does a fixed exchange rate affect monetary policy

Answer 6

It anihalates it

Question 7

What are the goals of monetary policy

Answer 7

Yo create a low and stable inflation and to maintain output around potential

Question 8

Why does the central bank target interest tares and not the money growth

Answer 8

Because interest rates are the things that affect inflation and output but it can drastically shift with the demand for money that can change independent of the central bank due to f.ex credit cards

Question 9

What is the divine coincidence

Answer 9

The fact that by keeping inflation on target unemployment reaches its natural rate and potential is reached

Inf = inf(e) - a(u(e)-u(p))

inf=inf(e) => u(e)=u(p)

Question 10

What is flexible inflation targeting

Answer 10

Acting on deviation from target slowly

Question 11

What is the Taylor rule

Answer 11

i the central bank should set = i(policy) + a(inf-inf(pol)) - b(u-u(n))

Question 12

If inflation is at policy level and unemployment is natural what interest rate should be set

Answer 12

Policy rate

Question 13

What interest rate should the central bank set if inflation is higher than target

Answer 13

Per its mission it should raise the interest rate above the policy rate to bring down inflation at the cost of greater unemployment

Question 14

Why must the central bank raise the interest above policy more than the divergence from target inflation

Answer 14

Because what matters is the real interest rate that decreases one for one with inflation

Question 15

How should the central bank react to abnormally high unemployment

Answer 15

Decrease interest rates below policy

Question 16

What is the shoe leather cost

Answer 16

The insignificant cost of visiting the bank more often in the case of larger inflation

Question 17

What are the costs of tax distortions during inflation

Answer 17

People often pay more than they should due to bracket creep and false capital gains rises due to inflation

Question 18

What is the money illusion cost related to inflation

Answer 18

That during and inflation people and firms have it harder to make good financial decisions

Question 19

How does inflation variability affect the economy

Answer 19

It increases the risks of bonds which increases borrowing rate that in turn decreases inflation

Question 20

What are the benefits of inflation

Answer 20

Seniorage, money illusions affect on real wage adjustment and the ability to create negative real interest rates

Question 21

What are the costs of inflation

Answer 21

Money, illusion, tax distortion, higher inflation variability and shoe leather costs

Question 22

What are quantitative easing or credit easing programs

Answer 22

The central bank attempting to decrease the risk premium of assets in an economy by buying them with printed money

Question 23

What measures have been taken in countries to limit bankruns

Answer 23

Deposit insurance and the central banks role as a lender of last resort

Question 24

What does the consensus better lean than clean mean in macroeconomics

Answer 24

That it is less costly to take preemptive action even if strange numbers could be natural than to clean up after. Better pop bubbles early

Question 25

What are macro prudential tools

Answer 25

Measures that target a specific troubled market rater than the entire economy like the interest rate

Question 26

What is the LTV ratio

Answer 26

A macro prudential tool targeted at the housing market limiting the loan to value ratio that customers can buy houses for

Question 27

What are some concerns regarding macroprudential tools

Answer 27

They are untested and can have complex side effects and they may give an independent central bank too much power

Question 28

Do central banks use a target nominal money growth target

Answer 28

No, because of the poor relation between money supply and inflation. Instead the target interest rates to satiate money demand