EVALUATION MONETARY POLICY

Question 1

What are the cons of expansionary monetary policy

Answer 1

demand pull inflation
current account deficit
liquidity trap
negative impact on savers
time lags

Question 2

even though Cb wanna increase IR theres still a risk of demand pull inflation as a

Answer 2

tradeoff

Question 3

if a cut ir for stimulating growht and unemployment this is a conflict with macro obj

Answer 3

stable inflation

Question 4

lets say in an economy growth and employment are really important - weve got a risk of demand pull inflation as a side effect what graph would i use to show this

Answer 4

AD shifting right but more along the staright line to show iflation

we get grow and employment

Question 5

why can lower ir create conflict of macro econ obj with current account deficit (widen

Answer 5

as theres growth in econ , Y RISE households spend more on improts whihc widens CA deficit

Question 6

in terms of liquiduity trao what is the keynseia argumet

Answer 6

interest rates have a lower bound

Question 7

what does interest rates have a lower bound mena

Answer 7

IR after a given point will loose their effectiveness when hit their lower bound

Question 8

explain IR have a lower bound argument for cons of monetary policy

(liquidity trap)

Answer 8

when ir hit lower bound economy enteres a liquidity trap

when ir already so low consumers and bs in economy have already converted their illiquid financial assets into more liquid assets liek cash

c - to facilaitate spending on g/s

bs- faciliate investment or hoard this money due to ncertainity about the future

therfore if Cb tries to cut IR further not effectove as indi -c/bs already got hoards of cash you can use to spend on g/s /invest
so dont need to borrow lots of moeny t faiclaite that so we wont see increase in consumption and investmetn

Question 9

negative impacts on savers

2 explanatinos (nominal IR)
(savings reduce)

Answer 9

when IR fall
ROR on savings fall
whihc is bad for people with savings

+ if inflaion higher than nominal IR then real return on savings could be negative
ror theyre geting is less than eise in prices in econ

but deeepr - incentive when ir are cut is to borrow and spend - if we see less and less savings this is dangerous as what if people made unemployed and dont got savings as safety net to fall on
their SOL is likely ot drop - might be homeless

we don wanna promo this incentive

Question 10

time lags

Answer 10

takes long time for IR to fully feed through diff channels of transmission mechasnims and then to boost AD fully

IR cut ake about 18months -2 years to fully feed through into econ and have full ipmat oN AD (UK)

Question 11

IN terms of time lags if we need short term boost , not likely to

Answer 11

not neccesarily gonn get it to the level we like cuz of time lags

Question 12

EVALS - What are the 5

Answer 12

size of output gap
consumer confidence
business confidence
banks willingness to lend/pass on full cut
size of the rate of the cut

Question 13

effectiveness depends on SIZE OF OUTPUT GAP xplain

in terms of close to full employment
and what we may see instead of what we want

in terms of in deep recession with huge ouptut gap

Answer 13

lets say IR cut to promo growht and reduce unemp

if econ already very close to fll emp - with samll -ve output gap

any cut in IR - may boost AD but we wont see much growht and reduced unemp

but what were gonna see more is inflation oovershooting target rate
- higher DPI as tradeoff

but if econ in deep recession with large -ve outout gap a cut in IR got greater potential to boost gorwht and reduce unemp without much DPI as a side effect

Question 14

CONSUMER AND BS CONFIDENCE IS

Answer 14

ESSENTIAL

Question 15

CONSUMER AND BS CONFIDENCE

why and whne do they need to be confident

what will happen if they are confident

what will happen if theyre not ocnfident

and talk about low confidence in terms of mortgaeg IR

Answer 15

consumers need to be confident in - job prospets, not gonna losse jobs, may get promo and earn higher Y

so if lower IR - MAY HAVE INCENTIVE TO BORROWN AND SEPND AS FEEL CONFIDENT

BS - need tobe confident if gonna borrow and invest , in future state of econ , expectations of demand and profitabliity for their bs

if thnk future profits will be hugh - theres a reason to incvest when IR are lower

but if bs and consumer confidence is low - no guarantee lower IR is gonna promo more borrowing for consumotio and investment

for mortgageIR - if consumer confidence is low , an increase in disposable income cuase of lower mortgagr repayments will translate to higher consumption

Question 16

bank willingness ot lend

if they dont IR cut is …

why might not they be willing to lend ….

what might they do instead of lending money out at lower IR

Answer 16

if cb cuts IR and bank passing in IR cu

if banks not willing to lend money then IR cut is pointless

may not be willing to lend when theres a banking crisis/financial sector crisis in an econ . unsure about financial security going forward

they might hoard cash instwad of lending out moeny at lower IR - meaning EMP useless

Question 17

banks willingness to pass on full cut

Answer 17

even if willing to lend

are they gonna pass on full cut

if dont we may not see boost in AD

Question 18

SIZE OF RATE CUT

What do we want for it to be effective

Answer 18

IF we want it to be effective a biger cut will be desirable

as makes it much cheaper for consumer snad bs to borrow /incentivise borrowing

therfore promo consumption and investmetn

also extra disposable income mortage payers will haveif its bigger will be more signififcnat which will boost consumption and AD

small rate cut wont have necessarily big impact in boosting AD