Important concepts in monetary policy

Question 1

Sacrifice Ratio

Answer 1

The percentage rise of unemployment for a 1% fall in inflation.

The cost of disinflation.

Question 2

Taylor Principle

Answer 2

The nominal interest rate must rise enough to push up the real interest rate so that the central bank’s interest rate response is actually stabilising.

Question 3

Taylor Rule

Answer 3

The rule that well described the fed’s historical interest rate behaviour.

If a, alpha and beta = 1, then the optimal Taylor Rule is:

rt - rs = 0.5 (πt- πT)

Question 4

Yield Curve

Answer 4

Plots the yield on bonds of different maturities against their maturity.

Question 5

Upwards Sloping Yield curve

Answer 5

Implies that longer maturity bonds have a greater yield than shorter maturity bonds.

Consistent with expectations that future rate increases will take place.

Question 6

What does a steep yield curve imply?

Answer 6

That significant rate increases will take place.

Question 7

What is the transmission mechanism from the official to market rate?

Answer 7

The yield curve. It transmits short-term changes to long-term changes in rates through the yield curve.