only part B To facilitate economic recovery since the Financial Tsunami in 2008, many developed countries adopted accommodation policies. However, there are heated debates on whether the accommodation policies should be conducted by rule or discretion. a. What is the time inconsistency problem? Explain why this problem can be avoided if monetary policy is conducted by rule rather than discretion. Illustrate with an example of a disinflation policy. b. Suppose in Country B, the housing bubble bursts. Household wealth has been reduced tremendously. i. Use the IS-LM model to explain the short-run effects of the housing bubble bursts. ii. Suppose her central bank targets on the interest rates as a rule of her monetary policy. Given this rule, what will the central bank in Country B do? Explain why this rule might create a more severe recession
Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
only part B
To facilitate economic recovery since the Financial Tsunami in 2008, many
developed countries adopted accommodation policies. However, there are
heated debates on whether the accommodation policies should be conducted
by rule or discretion.
a. What is the time inconsistency problem? Explain why this problem can
be avoided if
discretion. Illustrate with an example of a disinflation policy.
b. Suppose in Country B, the housing bubble bursts. Household wealth
has been reduced tremendously.
i. Use the IS-LM model to explain the short-run effects of the
housing bubble bursts.
ii. Suppose her central bank targets on the interest rates as a rule of her
monetary policy.
Given this rule, what will the central bank in Country B do?
Explain why this rule might create a more severe recession
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