Explaining the Shift in Monetary Policy Instruments
Imagine a central bank has lowered its primary short-term interest rate as far as possible, to a level near zero, but the economy remains sluggish. In response, the bank begins a large-scale program of purchasing long-term financial assets. Explain why, in this specific situation, the central bank's actions on long-term interest rates become more important for influencing the economy than its actions on the short-term rate.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
Related
QE's Impact on Bond Prices and Long-Term Interest Rates
A country's central bank has reduced its primary short-term policy interest rate to 0.1%, but economic growth remains stagnant. In response, the bank initiates a large-scale program to purchase long-term government securities from the open market. Which statement best analyzes the fundamental change in the central bank's operational strategy?
Evaluating Monetary Policy at the Zero Lower Bound
When a central bank's primary short-term policy rate is at or near zero and can be lowered no further, large-scale asset purchases are used to influence the economy. In this situation, the focus of monetary policy effectively shifts, making ________ the primary instrument for stimulating economic activity.
Evaluating Central Bank Policy Effectiveness
When a central bank's main short-term interest rate is near zero and it begins a program of purchasing large quantities of long-term government securities, the primary objective of this action is to directly provide commercial banks with more funds so they can increase lending.
Explaining the Shift in Monetary Policy Instruments
Match each economic scenario with the central bank's most likely primary monetary policy instrument used to influence overall economic activity.
Arrange the following statements into the correct logical sequence that illustrates how a central bank's primary method for influencing the economy can change during a major economic crisis.
Assessing Central Bank Policy Limits
Imagine an economy where the central bank's primary short-term interest rate has been held at 0% for over a year to combat a severe recession, with little success. The central bank then announces a new policy of purchasing large quantities of 10-year government bonds. During a press conference, the central bank governor states: 'Our traditional tool is exhausted, but our work is not done. By purchasing these long-term assets, we are now directly targeting the cost of long-term borrowing to encourage investment and spending.' Which of the following best evaluates the governor's statement?