Macroecon chapter 13

Question 1

Instruments of monetary policy (2)

Answer 1

• ΔMS
• Δi

Question 2

Why does BoC target i/Δi? (3)

Answer 2

• BoC control i (overnight interest rate ONR)
• Slope of MD is unclear
• Easy to communicate Δi to public

Question 3

Bank policy rate

Answer 3

ONR

Question 4

Bank rate (credit rate)

Answer 4

ONR + 0.25%

Question 5

Deposit rate

Answer 5

ONR - 0.25%

Question 6

Why is MS endogenous?

Answer 6

M0 (CC): Central bank money, monetary base
D: Deposit in commercial bank out of the direct control of BoC

Question 7

Open market operation

Answer 7

Passive/indirect strategies to control MS

Question 8

If buy bonds

Answer 8

Increase in M0 and MS

Question 9

If sell bonds

Answer 9

Decrease in M0 and MS

Question 10

Expansionary monetary policies (3)

Answer 10

• Increase in MS
• Decrease in ONR
• Open market purchase

Question 11

Contractionary monetary policies (3)

Answer 11

• Decrease in MS
• Increase in ONR
• Open market sell

Question 12

Why is BoC target inflation (3)

Answer 12

• Cost of inflation
• ΔMS => ΔP = ΔΛ
• Inflation targeting policy 1% ≤ Λ ≤ 3%

Question 13

How does BoC target Λ

Answer 13

Monitor the output gap rate
If Y>Yp => increase in price => increase Λ

Question 14

Gap rate formula

Answer 14

(Y - Yp)/(Yp) x 100

Question 15

Solution to positive shock on AD (increase in rate of inflation)

Answer 15

Contractionary monetary policy

Question 16

Solution to negative shock on AD (decrease in rate of inflation)

Answer 16

Expansionary monetary policy

Question 17

Divine coincidence (2)

Answer 17

• Inflation targeting
• Control of rate of inflation and output gap level

Question 18

What are limits of a policy based on?

Answer 18

Inflation targeting

Question 19

Lags in monetary policy (2)

Answer 19

• ΔAE
• Multiplier process

Question 20

Lags consequences (2)

Answer 20

• Destabilizing policy
• Communication problem