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Author Question: What is the argument against the use of autonomous tightening of monetary policy in response to a ... (Read 58 times)

DyllonKazuo

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on: Jun 30, 2018
What is the argument against the use of autonomous tightening of monetary policy in response to a credit-driven asset-price bubble?
 
  What will be an ideal response?

Question 2

Goods in the CPI inflation are weighted by
 
  a. the price of each good.
  b. the share of each good in GDP.
  c. the share of each good in the budget of an average household.
  d. the share of each good in total consumption.


adammoses97

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Reply #1 on: Jun 30, 2018
Answer to Question 1

Though a bubble may have begun with an abundance of credit seeking a profitable use, restricting credit is unlikely to dampen enthusiasm for assets that are known to be profitable. Indeed, a tightening of credit may impact only those who do not yet possess the lucrative bubble assets and enhance the rewards for those who do. Thus, the credit tightening ensures that the patient (the economy) is thoroughly weakened before the medicine of financial discipline takes effect.

Answer to Question 2

C


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