Formulae

Question 1

Taylor Rule

Answer 1

Neutral Rate + 0.5*(GDP Growth Forecast - GDP Growth Trend) + 0.5 * (Inflaiton Forecast - Inflation Target)

Question 2

Monetary Policy / Money Market Rates/ Bond Yield

(Initial recovery)

Answer 2

Initial Recovery
Monetary Policy: Stimulative stance. Transitioning to tightening mode.
Market Rates: Low/bottoming. Increases expected over progressively shorter horizons.
Yield Curve: Long rates bottoming. Shortest yields begin to rise first.
Curve is steep.

Question 3

Monetary Policy / Money Market Rates/ Bond Yield

(Early Expansion)

Answer 3

Early Expansion
Monetary Policy:Withdrawing stimulus
Market Rate: Moving up. Pace may be expected to accelerate.
Yield Curve: Yields rising. Possibly stable at longest maturities. ST steepening, LT flattening.

Question 4

Monetary Policy / Money Market Rates/ Bond Yield

(Late Expansion)

Answer 4

Late Expansion:
Monetary Policy:Becoming restrictive
Market Rate: Above average and rising. Expectations tempered by eventual peak/decline.
Yield Curve: Rising. Pace slows.
Curve flattening from longest maturities inward.

Question 5

Monetary Policy / Money Market Rates/ Bond Yield

(Slow Down)

Answer 5

Slowdown
Monetary Policy:Tight. Tax revenues may surge as accumulated capital gains are realized.
Market Rate: 	Approaching/reaching peak.
Yield Curve: 	Rising. Pace slows.
Peak. May then decline sharply.
Curve flat to inverted.

Question 6

Monetary Policy / Money Market Rates/ Bond Yield

(Contraction)

Answer 6

Contraction
Monetary Policy:Progressively more stimulative. Aiming to counteract downward momentum.
Market Rate: Declining.
Yield Curve: Declining.
Curve steepening. Likely steepest on cusp of Initial Recovery phase.