u are probably aware, since early 2022 until now, many central banks around the world, especially in advanced nations, have aggressively raised policy interest rates to curb inflation. Describe how the RBA’s interest rate rises might impact Australia’s aggregate demand and GDP growth via the TWO channels of monetary transmission listed below: (i) asset prices (ii) savings and investment

u are probably aware, since early 2022 until now, many central banks around the world, especially in advanced nations, have aggressively raised policy interest rates to curb inflation. Describe how the RBA’s interest rate rises might impact Australia’s aggregate demand and GDP growth via the TWO channels of monetary transmission listed below: (i) asset prices (ii) savings and investment

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter15: Monetary Policy

Section: Chapter Questions

Problem 4WNG

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The monetary policy rate is the rate at which the Central Bank of Ghana lends to commercial banks. The results from table 4.4.1 shows that the monetary rate in Ghana declined from 2019 to 2021, before rising in 2022. The decline in the monetary rate from 2019 to 2021 can be attributed to an expansionary monetary policy, which was implemented to boost the economy of Ghana by reducing unemployment. The rise in the monetary rate in 2022 is a sign of a contractionary monetary policy, which is intended to reduce money supply and increase the cost of borrowing. This can help control inflation but may also lead to lower economic growth due to reduced aggregate demand (consumption). Consumption which is a component of GDP, the decrease in Aggregate demand will lead to decrease GDP and economic growth at large. Digitalization has become the norm in all parts of life, including finance. Mobile money has acquired substantial acceptance in Ghana as a simple mechanism for fund transfers, payments,…
In an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of money V i.e. M = PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) ΔΜ = +g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ebi The nominal interest rate i is determined by i = r" +7, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g = 0.03, r" = 0.05, b =1, and Vo = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is T = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.10? (c) What rate of inflation maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?
Central bank has the following loss function:L=−(yt −ye)+β(πt −πT )2 (13.1) Consult Chapter 13 to answer the following questions: (a) What can we interpret about the central bank’s preferences from this loss function (Equation 13.1)? (b) Briefly explain how this loss function compares to the standard loss function and a loss function with yT > ye. (c) Find the inflation bias for a central bank with this loss function (Equation 13.1). [Hint: see Section 4.6 in Chapter 4].
Consider the effects of events in the U.S. economy on the Canadian economy and on Canadian monetary policy. 1) If a economic boom begins in the United States, what is the likely effect on the Canadian aggregate demand? Explain. 2) If Canadian real GDP was equal to Y* (the potential GDP) before the U.S. boom began, what would be the likely response by the Bank of Canada to push Canadian GDP back to Y*? 3) Given the mobility of financial capital across international boundaries, what is the likely effect on Canadian aggregate demand from a policy by the U.S. Federal Reserve that raises U.S. interest rates? 4) Given your answer to part 3), explain why Canadian monetary policy might sometimes appear to “mirror” U.S. monetary policy even though the Bank of Canada is wholly independent from the U.S. Federal Reserve.
Governments are responsible for maintaining full employment, price stability, and economic growth – using fiscal and monetary policies. Evaluate how the government of the United States achieves these objectives with the implementation of a Stimulative Monetary Policy. Clearly state the economic conditions that would justify the use of a stimulative policy, explain the measure(s) that would be taken and the anticipated impact.
Q7.On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (December 4, 2020) decided tokeep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 4.0 percent.Consequently, the reverse repo rate under the LAF remains unchanged at 3.35 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 4.25 per cent. Assess the present liquidity scenario in India and give your opinion about the impact of this reduction on money supply and also suggest other measures that RBI can take in recent times to maintain liquidity.
In an economy at its steady state, real GDP, Y, increases at the rate g+n, where g is the technological growth rate and n is the rate of population growth. The monetary base M is equal to nominal GDP divided by the velocity of i.e. M - PY/V where P is the price level. Thus, assuming the velocity of money is constant, the growth rate of the monetary base will be (approximately) money V ΔΜ =*+g+n M where is the inflation rate. The velocity of money is determined by the function V = V°ehi The nominal interest rate i is determined by i = r" +T, where the natural real interest rate r" is constant in steady state and taken as given. Assume that n = 0, g= 0.03, r" = 0.05, 6 =1, and V" = 20. (a) What is the seignorage as a fraction of nominal GDP, when inflation is a = 0.01? (b) What is the seignorage as a fraction of nominal GDP, when inflation is a =0.10? (c) What rate of inflation w maximizes seignorage? (d) What is the maximal seignorage as a fraction of nominal GDP?
During an economic downturn, a nation's central bank decides to implement quantitative easing by purchasing large amounts of government securities to increase the money supply and encourage lending and investment. This policy action is intended to: A) Tighten the money supply B) Increase interest rates C) Stimulate economic growth D) Reduce public spending
The equilibrium output level in the country of Plutonia is $44 billion, while its potential output is $74 billion. Suppose the central bank of the country implements an expansionary monetary policy. Which of the following is likely to occur? a) An increase in interest rates will stimulate investment, shifting the aggregate demand curve to the right. b) A reduciton in interest rates will lower investment, shifting the aggregate demand curve to the left. c) An increase in interest rates will lower investment, shifting the aggregate demand curve to the left. d) An reduction in interest rates will stimulate investment, shifting the aggregate demand curve to the right.
There are four main transmission channels that can be used as monetary policy to target the official interest rate. Identify each of the four transmission channels and explain, within the context of monetary policy, the impact each channel has on economic activity.
Please label your answers to the following questions clearly. (a) Define what is meant by the term monetary policy. (b) Outline what actions the central bank should take in the money market in response to the emergence of significant inflation, and briefly explain what consequences this would have for that market. (c) Briefly describe two ways in which the changes outlined in your answer to Part (b) would be transmitted to the wider economy.
Consider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?