Overnight target rates and inflation, Macroeconomics

Assignment Help:

Overnight target rates and inflation

One of the major targets of every central bank is a low and stable inflation. Its main control variable is the overnight interest rate target and mechanism which allows the target to affect inflation is known as transmission mechanism. A brief account of the transmission mechanism looks like this: 

1. When central bank target rate increases, other interest rates in economy will increase (and money supply will decrease, however that isn't important here). 

2. With higher interest rates, it's more expensive to borrow and more advantageous to save. Hence, investment and consumption will decrease (we say that central bank 'cools off' the economy). 

3. As consumption and investment fall, GDP is reduced and unemployment will rise. This will cause inflation and growth rate in wages to fall.


Related Discussions:- Overnight target rates and inflation

The core of macroeconomics, Suppose in the Republic of Madison that the reg...

Suppose in the Republic of Madison that the regulation of banking rested with the Madison Congress, including the determination of the reserve ratio. The Central Bank of Madison is

Average monthly total revenue from the sale, The Stop decay company sells a...

The Stop decay company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decay fighter, redu

Draw the demand curve, The total demand (marginal benefit) curve for visiti...

The total demand (marginal benefit) curve for visiting the Great Barrier Reef is as follows: Price = 5000+100*Fish Biomass (tons per square mile) -10*Number of Trips. a. Does th

Influence the losing price bubble, What happened to the credit standards (e...

What happened to the credit standards (e.g., minimum down payment, mortgage loan relative to the value of the house, and creditworthiness of the borrower) between 1995 and 2005? Wh

What are between material and non-material progress, What are between mater...

What are between material and non-material progress? • Material progress considers to as economic growth. Growth is only one dimension of development. Growth doesn’t unavoidab

Determine the experimental design, An ecologist is interested in the possib...

An ecologist is interested in the possible negative effects of marinas and boat mooring areas on the abundances of fish. Having read Hurlbert's paper about pseudoreplication, he de

Calculate the monetary policy multiplier, Consider the following macroecono...

Consider the following macroeconomic model: Y = C + I + G + NX C = 100 + 0.8 YD I   =  300 - 1000 i NX =  195 - 0.1 Y - 100 (E.R.) E.R. =  0.75 + 5 i M  =  ( 0.8

Calculate the number average molecular weight, You have two bags of polymer...

You have two bags of polymer. Bag A has 10 kgs of polymer with weight average molecular weight of 336.6 kg and Bag B has 20kg of polymer with weight average molecular weight 392.7k

Find the compensating variation , Joe has preferences over pizza (p) and be...

Joe has preferences over pizza (p) and beer (b) given by U = pb. The marginal utilities are MU p = b and MU b = p, and Joe's income is I = 60. 1. Find Joe's optimal consumptio

Quantity of twinkies demanded increases, Suppose the price of Twinkies decr...

Suppose the price of Twinkies decreases from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd