Author Question: Suppose the central bank announces that it will pursue a monetary expansion in the current period ... (Read 89 times)

vicky

  • Hero Member
  • *****
  • Posts: 586
Suppose the central bank announces that it will pursue a monetary expansion in the current period and a monetary expansion in the future. Explain how the credibility of the central bank might influence the effectiveness of this monetary policy action and announcement of a future monetary policy action.
 
  What will be an ideal response?

Question 2

Suppose bank A has assets of 100, liabilities of 80, and capital of 20. Its capital ratio is
 
  A) 20.
  B) 25.
  C) 11.
  D) 10.



tandmlomax84

  • Sr. Member
  • ****
  • Posts: 323
Answer to Question 1

If individuals do not believe the Fed, we will observe the downward shift in the LM curve causing current rates to fall and current output to rise (with no shift in the IS curve). If individuals believe that the Fed will follow through with this in the future, the LM curve will shift down causing r to fall and Y to rise. The expectation that this will continue will cause individuals to expect lower future rates and higher future output. The lower future rates will increase current C and current I. The higher future Y will do the same. So, we will also see a rightward shift in the current IS curve. This will tend to increase the current r and current Y as well. In short, we would observe a shift in the IS curve causing current Y to increase even more. So, the credibility of the Fed plays a critical role in influencing the effectiveness of monetary policy.

Answer to Question 2

A



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Medications that are definitely not safe to take when breastfeeding include radioactive drugs, antimetabolites, some cancer (chemotherapy) agents, bromocriptine, ergotamine, methotrexate, and cyclosporine.

Did you know?

According to the American College of Allergy, Asthma & Immunology, more than 50 million Americans have some kind of food allergy. Food allergies affect between 4 and 6% of children, and 4% of adults, according to the CDC. The most common food allergies include shellfish, peanuts, walnuts, fish, eggs, milk, and soy.

Did you know?

To maintain good kidney function, you should drink at least 3 quarts of water daily. Water dilutes urine and helps prevent concentrations of salts and minerals that can lead to kidney stone formation. Chronic dehydration is a major contributor to the development of kidney stones.

Did you know?

The use of salicylates dates back 2,500 years to Hippocrates's recommendation of willow bark (from which a salicylate is derived) as an aid to the pains of childbirth. However, overdosage of salicylates can harm body fluids, electrolytes, the CNS, the GI tract, the ears, the lungs, the blood, the liver, and the kidneys and cause coma or death.

Did you know?

About 100 new prescription or over-the-counter drugs come into the U.S. market every year.

For a complete list of videos, visit our video library