Question

In: Economics

What are the three channels of monetary policy? Explain each of these in detail. Also explain...

What are the three channels of monetary policy? Explain each of these in detail. Also explain under what conditions monetary expansion fail to affect aggregate demand for goods and services in the short run and long run.

Solutions

Expert Solution

Three channels of monetary policy are

* Interest rates - Government tries to control monetary policy through changes in interest rates . An increase in interest rate will encourage people to save more and spend less . Thus increased savings will reduce money supply.

* Exchange rate - Exchange rate is rate at which country trade with each other . Central banks intervenes in foreign exchange market to control movement of currency so that it doesn't move out of bounds. Central Bank by buying and selling foreign and domestic currency tries to control the money supply.

* Lending activities- Central banks by increased lending can increase or decrease the level of money supply in economy.

In the case of liquidity trap monetary policy is ineffective in both short run as well as in long run.

Liquidity trap is a condition in which interest rates are so low that changes in money supply didn't have any affect on output level .


Related Solutions

Explain three channels of monetary policy transmission.
Explain three channels of monetary policy transmission.
Discuss the channels of Monetary Policy transmission.
Discuss the channels of Monetary Policy transmission.
Explain the difference between fiscal and monetary policy. Who makes each of these policies? Explain. Also,...
Explain the difference between fiscal and monetary policy. Who makes each of these policies? Explain. Also, explain any 2 (two) steps that can be taken to increase the supply of money in circulation by using monetary policy.
Monetary Policy What are the three tools of monetary policy? During a recessionary gap, as is...
Monetary Policy What are the three tools of monetary policy? During a recessionary gap, as is currently being experienced, as signified by the       designation that the economy entered into a recession in February of this year, what       can and has the FOMC of the Federal Reserve done with regards to interest rates? How will this change to interest rates affect AE and equilibrium GDP?
Please explain the difference between monetary policy and fiscal policy AS detail as possible Thanks
Please explain the difference between monetary policy and fiscal policy AS detail as possible Thanks
Explain in detail the process of Monetary Policy transmission of a decrease in the cash interest...
Explain in detail the process of Monetary Policy transmission of a decrease in the cash interest rate. Use relevant graphs to describe how a Central Bank’s action on the interest cash rate ripple through the economy and lead to the target policy goal. (Three connected diagrams should be used: (1) money supply and demand (2) investment demand schedule (3) AS/AD diagram. Interest rates is the variable that connects the first and second diagram).
Explain the three major tools of monetary policy. Discuss how each is used in terms of...
Explain the three major tools of monetary policy. Discuss how each is used in terms of stages of the business cycle-- specifically in the expansion and recession phases?
1). Explain the Fed's three tools of monetary policy and how each is used to change...
1). Explain the Fed's three tools of monetary policy and how each is used to change the money supply. Does each tool affect the monetary base or the money multiplier? 2). Suppose everything else equal; a) the Central Bank raises the reserve requirement to 20 percent, b) the currency deposit ratio rises to 60 percent. Which development, a) or b) will affect the money multiplier more? Why? 3). Suppose the Central Bank of Turkey starts to pay interest on reserves....
explain in detail how monetary policy, fiscal policy and international trade has changed in the wake...
explain in detail how monetary policy, fiscal policy and international trade has changed in the wake of the pandemic. Apply these concepts to the current economic situation caused by COVID-19.
Describe Monetary Policy and Fiscal Policy in detail. 2. What are the principles of bank management?...
Describe Monetary Policy and Fiscal Policy in detail. 2. What are the principles of bank management? Do you think these principles are the essence of the banking system?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT