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 model building, THE MODEL BUILDING    A model of individual or a...

THE MODEL BUILDING    A model of individual or aggregate economic phenomena represents a simplification of real world economic complexities. It may be expressed in words, ta

Components of trade policy, COMPONENTS OF TRADE POLICY: External secto...

COMPONENTS OF TRADE POLICY: External sector reforms beginning with 1991 included dismantling of  trade restrictions along with tariff rationalization, a move towards current a

Distinguish between static and dynamic gains from trade, Question 1: Cr...

Question 1: Critically analyse the costs of inflation. Which of these items is likely to have encouraged many governments in their adoption of inflation as public enemy number

Price results in the efficient quantity, The Price ceiling is the law that ...

The Price ceiling is the law that sets a maximum price below the equilibrium market price, but a price floor is the law that sets a maximum price above the market equilibrium price

Decay toothbrush and decay fighter toothbrush, The Stop decay company sells...

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

Money banking and finance, The analysis of the speculative demand for money...

The analysis of the speculative demand for money reveals the importance of the level of wealth. Explain this assertion in detail

Millions of americans purchase, Each day millions of Americans purchase mil...

Each day millions of Americans purchase millions of goods and services. These goods and services are generally readily available, as long as you have the necessary money to purchas

Homework, During the 1990s, technological advance reduced the cost of compu...

During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use of supply and demand diagrams, how the following markets are affected in terms of

Kind of goods also the mrs, Suppose the utility function is given by: u(x,y...

Suppose the utility function is given by: u(x,y) = 3x+4y. What kind of goods are X and Y and what is the MRS?

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