Question

Define each:

1. Quantitative easing

2. Forward guidance

3. Okun’s Law

4. NAIRU

Answer 1

1. Quantitative easing refers to the Quantitative tool used by the country's central bank in order to change the money supply of the country. It includes open market operation in which central bank through open market sale and purchase of securities affect the interest rate in the long run that affect investment and consumption decision.

2. Forward Guidance: Forward guidance includes communication form the central bank about the future state of the country and what will be the appropiate monetary policy which is based on price stability.

3. Okun' Law: It shows the relationship between growth rate and level of unemployment. It tells us how much country level of output will change if unemployment rate is above its natural level. The original statement of the law was that for every 1% increase in unemployment in an economy growth rate of output is to 2.5% below its natural rate in the economy.

4. NAIRU: It means Non Accelerating Inflation Rate of Unemployment. It shows that level of unemployment at which inflation rate is constant. It means at that level of unemployment inflation does not change.