Our formulation of monetary policy has thus far assumed that the central bank can set the nominal interest rate in accordance with the outcome determined by the Taylor rule. However, since 2008 many central banks have hit the zero lower bound on nominal inter- est rates, limiting the stimulus they can provide. Consider a modified Taylor rule which obeys ax{0, πt + p + 0π(πt − π† ) + Oy (Yt − Yt)}. it = max The "max" operator means that interest rates will take whichever value is larger, 0 or the value determined by the Taylor rule. Derive the dynamic aggregate demand curve under a normal Taylor rule and when the zero lower bound is binding. Provide some intuition for the differences between them
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.
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