Monetary Policy - Monetary Policy and Aggregate demand - monetary policy in practice
7 important questions on Monetary Policy - Monetary Policy and Aggregate demand - monetary policy in practice
What do we call the process by which a change in monetary policy or the interest rate would work its way through the economy eventually affecting the economy's output and inflation rate?
In what 4 ways can changes in the target for the overnight rate affect the economy?
- Interest rate on other assets and loans
- asset prices
- market expectations
- the exchange rate
What happens to interest rate on other assets and loans when the central bank lowers its overnight rate target?
- The interest rate on other assets and loans falls
- the fall on interest rates makes borrowing less expensive,
- and encourages firms and households to borrow more money
- resulting in an increase in both consumption and investment spending
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What happens to GDP as asset prices increase when the interest rate falls?
asset prices such as homes stocks bonds will increase
households increase their spending on final goods and services
What happens to net exports as currency changes when the interest rate falls?
- A fall in canadian interest rate will make canadian assets less attractive to investors.
- foriegn investory will buy fewer canadian assets, while canadian investors will buy more foreign assets
- the rise in net foreign investment will result in the depreciation of currency in the foreign exchange market
- a weaker currency makes domestic goods become less expensive and simulates our net exports
How would the expected inflation rate to rise when the central banks does what with the ocernight rate?
- When the central bank lowers the target for the overnight rate
- people would expect the inflation rate to rise in the future
- a higher inflation rate in the future would lead to an increase in interest rates wages.
Suppose the economy is in a recessionary GAP, if the central bank lowers the target for the overnight rate, what happens to the AD curve?
- when the central bank lowers the target overnight rate
- this increases the money supply
- which in turn increases consumption investment and net exports
- this increase in the money supply shifts the AD curve towards the right.
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