Topic 8 - Monetary Policy Flashcards
1
Q
How can the IS curve be simplified further
A
- Y = A bar - delta * r
- Where A bar = A + (1/ 1 - b) * G0 - b * T0
2
Q
What is the main factor in how the IR curve is set
A
- r = r(CB)
- r(CB) is determined by the level inflation
3
Q
What is the New Keynesian Phillips curve (NKPC)
A
- Inflation(pi) = pi^e(expected future inflation) + Kapita(Y - Ystar) + u
- Where Kapita > 0
- u = cost-push shock
- Y - Y star = output gap
4
Q
What equations are used in the three equation model
A
- IS, IR, NKPC
- This model determines inflation, aggregate expenditure and interest rates
5
Q
What is the difference between strict and flexible inflation targetting
A
- Strict IT only foccuses on inflation and does not care about side affects
- Flexible IT has inflation as its primary goal, but other factors are still taken into consideration
6
Q
What causes NKPC to shift
A
- Changes in the value of u
7
Q
What did John Taylor suggest
A
- To scrap committees that set rates and create and algorithm
8
Q
What are the potential advantages to John Taylors suggestion
A
- Predicatable
- Transparent
- Avoids human error
9
Q
What is the equation for The taylor rule
A
r(CB) = r star + beta(pi - pi star) + alpha(Y - Ystar)
10
Q
What is the zero lower bound (ZLB)
A
- The inability to set negative interest rates
- r(CB) >= 0
11
Q
What are the two ways to prevent deflationary spirals
A
- Price-level targetting (PLT)
- Taxing money
12
Q
What does PLT do
A
- Keeps CPI on target path
- Undoes past deviations from target
- e.g. if inflation dropped from 2% to 1% inflation would raise to 3% for a period to counteract this
13
Q
What is the main idea behind taxing money
A
- To eliminate the ZLB
- Effectively nominal return on currency is zero
- Therefore currecny is taxed at rate t, the effective lower bound is r(CB) = -t
14
Q
What are the three ways to tax money
A
- Gesell tax, stamp all currency
- Implicit tax, alter exchange rate between currency and deposits
- Abolish currency completely
