Ch 10 - New Keynesian models of monetary policy

Question 1

What are the core assumptions in the new keynesian models of monetary policy?

Answer 1

Inflation is persistent
There’s a time lag between when the economy faces a shock and when the response of the CB is fully felt
Imperfect competition in the goods mkt and nominal rigidities

Question 2

What are the 3 elements in the new keynesian models of monetary policy?

Answer 2

IS cures
New Keynesian Phillips curve
Monetary policy rule curve

Question 3

The MR line shows the _______ the CB will choose, given the _______ that it faces

Answer 3

Level of output, PC constraints

Question 4

What is the interest rate rule?

Answer 4

A positive inflation gaps necessitates an increase in the int rate above target and vice versa

Question 5

A positive demand shocks leads to a ___ inflation revision

Answer 5

Procyclical

Question 6

What are financial accelerator models?

Answer 6

Modifications to the basic new Keynesian model in order to take in a/c some real world constraints

Question 7

What are 2 key frictions credit markets are affected by?

Answer 7

Asymmetric information, Agency cost

Question 8

What is external finance premium?

Answer 8

Difference between the cost of funds raise externally and the opp cost of funds internal to the firm

Question 9

What is meant by net worth of borrowers?

Answer 9

Borrower’s liquid assets plus tangible and intangible assets less obligations

Question 10

What are the 2 broad approaches to carrying out MP?

Answer 10

Rules, Discretion

Question 11

What is the Taylor Rule?

Answer 11

Prescribes how the CB should adjust its int rate policy instrument in a systematic manner in response to developments in inflation and macroeconomic activity