Question

**Suppose a central bank decides to conduct monetary
policy according to a rule for interest rates.**

**a) How does it choose the basic setting for the interest
rate within the rule?**

**b) How would it respond to a rise in the output gap (Y
−YP)?**

**c) How would the bank react to an inflation rate higher
than its target inflation rate?**

Answer #1

a) The Central bank could choose Taylor's Rule setting the interest rate.

Taylor's Rule says that:

i= r*+ p+0.5(p–p*)+0.5(Y–Yp)

Where i= Nominal Interest Rate

r*= Real Interest Rate

p= Rate of Inflation

p*= Target Inflation Rate

Y= Output

Yp= Potential Output

b) It would Increase the Nominal Interest Rate as Output Gap Increases as can be seen from the equation above.

c) If Inflation Rate is Higher than its target Inflation Rate then it will increase the Nominal Interest Rate. This again could ne seen from the equation above. In the equation, as p Increases and is Higher than p*, Central bank would Increase the nominal Interest Rate

Recall the Taylor Rule for interest rate targeting. ? = ? ∗ + ?
+ ?(? − ? ∗ ) + ?? ? Consider an economy where the equilibrium real
interest rate is ? ∗ = 0.02 and the central bank’s target inflation
rate is ? ∗ = 0.02. The central bank equally weights inflation and
output deviations, i.e. ? = ? = 0.5
a. Suppose that inflation is currently 1.3%. Also, while the
economy’s potential GDP is $12 trillion,...

Assume the central bank decides to move and close the
GDP gap instead of fiscal policy.
In what direction will interest rates have to move to
close the GDP gap and what type of open market operation will the
central bank undertake?
GDP gap (Recessionary and inflationery)

1-Explain how the central bank conduct monetary policy by
targeting the federal fund rate, and through open market
operation.
2- Explain the non-conventional monetary policy: the quantifying
easining.
3-Briefly talk about the differences between monetarist monetary
policy and Keynesian monetary policy.
answer this question hurry up plz

Interest rates fall when
the central bank conducts contractionary monetary policy
an increase in savings increases the supply of loanable funds in
the economy
a new technology leads people to borrow more in order to invest
in the new technology
the central bank sells Treasury bills

PROBLEM 5:
MONETARY POLICY
If the central bank of Canada institutes a contractionary
monetary policy, describe what will happen to the following
variables relative to what would happen without the policy:
The money supply
Interest rates
Investment
Consumption
Net Exports
The aggregate demand curve
Real GDP
The price level
The value of the Canadian dollar
The long run aggregate supply curve
PROBLEM 5:
MONETARY POLICY
If the central bank of Canada institutes a contractionary
monetary policy, describe what will happen...

Using the concepts of fiscal/monetary policies, active/passive
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following policies a.he central bank follows a policy of allowing
the money supply to grow at a constant 4 percent per year; b. the
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6)
Let’s try to understand the long-run and short-run implications
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and that monetary policy has an inflation targeting rule that makes
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equilibrium real interest rate in the economy is 1% and that “beta”
in the Phillips curve is 1.2.
a) In the long-run, the output gap should be 0% and there should
be no shocks to inflation. In that situation what will...

Assume the central bank decides to move and close the
GDP gap (inflationary and recessionary )instead of fiscal
policy.
In what direction will interest rates have to move to
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central bank undertake?

According to the monetary policy rule, under what condition does
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