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 ban
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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