Question

The Bank of Korea’s monetary policy is to reduce the vulnerability of South Korean won and achieve price stabilization through increasing money supply and lowering interest rates.

1- How does the Bank of Korea attempt to minimize the output gap through money supply and interest rates?

2-.     How does the policy affect the price level in the short run and the long run?

3-.     Can the Bank of Korea achieve price stability and economic growth simultaneously?

Answer 1

1.

Bank of Korea increases the money supply and reduces the interest rate. it helps bring more money to the economy as well as lower the rates at that, banks are going to lend money to the households and firms. It makes consumption and investment spending to take place as cost of borrowing decreases. It increases the real output and output gap decreases.

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2.

In the short run as well as in the long run, the policy is going to increase the price level. Since, price level is a nominal variable, then it can increase in the short run as well as in the long run.

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3.

No, when bank of Korea pursues expansionary policy, then it achieves economic growth, but price level also increases. So, the goal of price stability is not achieved. Hence, the bank of Korea has to make a trade off at a certain level where the economic growth is restricted to achieve the price stability at a certain level in the economy.