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

Why does an indifference curve never meet, No indifference curve can inters...

No indifference curve can intersect due to all points on indifference curve are ranked equally preferred and ranked or less more preferred than each other point on the curve.

Expenditure methods, Expenditure method is also called Flow-of-Expenditure ...

Expenditure method is also called Flow-of-Expenditure method, consumption and investment method, income Disposal method, etc. Expenditure method measures the final expenditure

Calculate profit-maximizing price and quantity, A monopolist faces the foll...

A monopolist faces the following demand function for its product: Q = 45 - 5P The fixed costs of the monopolist are $12 and the variable costs are $5 per unit. a) What are the pro

#titleINTERNATIONAL TRADE., WHAT ARE THE TYPES OF PROTECTIONISM IN INTERNAT...

WHAT ARE THE TYPES OF PROTECTIONISM IN INTERNATIONAL TRADE

Keynesian Model, according to the Keynesian model, the short-run aggregate ...

according to the Keynesian model, the short-run aggregate supply curve is horizontal when: A: there are unemployed resources and prices do not fall when aggregate demands falls. B:

European commission bail, Will the Euro survives? 1. Why are Greece, Ire...

Will the Euro survives? 1. Why are Greece, Ireland, Italy, Portugal, and Spain sometimes referred to as the euros zones "peripheral countries"? 2. Why did the European commis

Illustrate budget constraint and optimal bundle, Danny is an investment ban...

Danny is an investment banker and has income I = 300. When prices are px = 10 and py = 20, Danny consumes the bundle (x; y) = (6; 12). 1. Illustrate Danny's budget constraint

Determine about the gross domestic product growth, Determine about the gros...

Determine about the gross domestic product Growth By (nominal) GDP-growth we mean % change in (nominal) GDP over a particular period of time. Real GDP growth is stated as perce

Explain the money market diagram, Q. Explain the Money market diagram? ...

Q. Explain the Money market diagram? Let's begin by studying the money market when GDP is given. When Y is given, MD will only rely (negatively) on R and we can draw a figure w

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