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

Enumerate in detail about the financial markets, The Government, Rest of th...

The Government, Rest of the World and the financial markets Total expenditure of the government may be divided into two parts: transfers to the private sector and consumpti

Implement sap to improve processes, Explain how a Fortune 500 company has b...

Explain how a Fortune 500 company has been able to implement SAP to improve their processes. Suppose the supply function for product X is given by Qsx = -50 + 0.5Px - 5Pz. A.

Various types of sports clothing, ABC Sports, a store that sells various ty...

ABC Sports, a store that sells various types of sports clothing and other sports items, is planning to introduce a new design of Arizona Diamondbacks' baseball caps. A consultant h

Estimate the wacc and cost of capital, Cowboy Corporation is estimating its...

Cowboy Corporation is estimating its WACC.  The firm's debt structure contains: (1) 30,100 long-term bonds with an 8.1% coupon, paid semiannually, a 10 years-to-maturity, and a $10

Firm''s total revenues, How much will your firm's total revenues (revenues ...

How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?

Financing of the external payments deficit, Financing of the external payme...

Financing of the external payments deficit: The trend  in India's widening CAD during the second half of  the eighties, both in absolute terms and also as a proportion of the

Null and alternative hypothesis, To determine whether high blood pressure a...

To determine whether high blood pressure affected whether a person had a stroke, a sample of 300 people who had had strokes are examined. In the sample, 37% had high blood pressure

Forex, what is largest business in thailand

what is largest business in thailand

Free trade help the u.s. economy, Why and how does free trade help the U.S....

Why and how does free trade help the U.S. economy? How might free trade hurt the U.S. economy?

Impact of minimum wage law, Minimum wage laws are common in many countries....

Minimum wage laws are common in many countries. The debate over minimum wage includes claims about the impact of this action on employment levels and wage levels. What impact does

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