Exam 12: Monetary Policy in the Short Run

Figure 12.5       Panel (a)                                   Panel (b) -Refer to Figure 12.5.If exchange rates are floating,the Bank of Canada decreasing its target inflation rate would best be represented by a movement from ________ in panel (a)and a corresponding movement from ________ in panel (b).

If exchange rates are floating,a contractionary monetary policy in Canada will cause the dollar to ________ relative to other currencies and cause net capital outflows to ________.

Figure 12.6            Panel (a)                        Panel (b) -Refer to Figure 12.6.Under a fixed exchange rate system,the central bank cannot increase the output gap with expansionary policy and still maintain the fixed exchange rate if the economy is at

What is a liquidity crisis?

Suppose the economy is initially above potential GDP,and the actual inflation rate is greater than the expected inflation rate.Use the IS-MP model and the Phillips curve to explain what happens if the Bank of Canada adjusts the interest rate to achieve the goal of price stability.

Figure 12.1 -Refer to Figure 12.1..Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If an economic shock causes the IS curve to shift from IS₁ to IS₂,this will

Figure 12.1 -Refer to Figure 12.1..Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,the shock will cause a

What are policy lags? Explain the three policy lags faced by the Bank of Canada when implementing monetary policy.

According to the policy trilemma hypothesis,of the three goals generally pursued by policymakers in an open economy,

The Bank of Canada was created

Which of the goals pursued by policymakers in an open economy is desirable because it can reduce the severity of business cycles?

What are the effects of an expansionary monetary policy on interest rates and output in an open economy with fixed exchange rates?

The Board of Directors of the Bank of Canada consists of

Assume that the term structure effect and the default-risk premium remain unchanged and that households and firms have adaptive expectations.At the beginning of 2013,a bank is offering car loans at a nominal interest rate of 7% and the expected rate of inflation is 2 %,and at the beginning of 2014,the bank decreases the nominal interest rate to 5%.The real interest rate at the beginning of 2014 is

Under a fixed exchange rate system,if the real interest rate is at its lower bound and the central bank implements expansionary policy,real GDP will ________ and the output gap will ________.

In general,if the Bank of Canada increases its target for the overnight rate,

What are the main arguments for and against central bank independence?

Figure 12.1 -Refer to Figure 12.1...Suppose the economy is initially at full employment with real GDP equal to potential GDP,and the expected inflation rate equal to the actual inflation rate.If the economy then experiences a negative demand shock,and the central bank responds to the results of the demand shock with an appropriate monetary policy,the central bank response will

Figure 12.4 Scenario: The above figures represent the economy of Mondolvia, where points A, B, C, and D in the first figure reflect the corresponding points in the second figure. The economy of Mondolvia is initially at equilibrium with real GDP equal to potential GDP. In April 2012, Mondolvia reached the peak of a rapid housing bubble that dramatically increased consumer wealth. The central bank of Mondolvia recognized this housing bubble peak existed in June, 2012 and implemented corrective policy in August 2012. The corrective policy actually changed output in the economy 12 months after it was implemented. In the meantime, the housing bubble burst in December 2012, returning the economy back to its initial, pre-bubble equilibrium level. -Refer to Figure 12.4.Since the housing bubble burst and the economy returned to its initial,pre-bubble level before the corrective policy changed output,the economy actually moved from ________ after the bubble burst.

What are the effects of an expansionary monetary policy on interest rates and output in an open economy with floating exchange rates?