Suppose the economy is in long-run equilibrium, but the central bank decides to increase bank rate (the rate at which the central bank lends to banks). How does this affect the economy in the short run if the monetary policy is not fully anticipated? What are the effects in the short run if the policy is anticipated? Enter your results in the following table. Short-Run Effects If Unanticipated Short-Run Effects If Anticipated Aggregate Demand increase/no change/decrease increase/no change/decrease Short-Run Aggregate Supply increase/no change/decrease increase/no change/decrease Price Level increase/no change/decrease increase/no change/decrease Output Level increase/no change/decrease increase/no change/decrease Real Interest Rate increase/no change/decrease increase/no change/decrease
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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Short-Run Effects If Unanticipated
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Short-Run Effects If Anticipated
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|---|---|---|
| Aggregate Demand | increase/no change/decrease | increase/no change/decrease |
| Short-Run |
increase/no change/decrease | increase/no change/decrease |
| increase/no change/decrease | increase/no change/decrease | |
| Output Level | increase/no change/decrease | increase/no change/decrease |
| Real Interest Rate | increase/no change/decrease | increase/no change/decrease
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