Chapter 13, Understanding interest rates and monetary policy Video Solutions, Economics for business competition, macro-stability, and globalisation

Problem 1

In the present macroeconomic situation, the requirements of non-inflationary growth point to the importance of monetary policy in moderating demand where margins of spare capacity have virtually disappeared. ... It [monetary policy] should support a recovery of activity only where such margins remain large and there is little risk of inflation.

This is the OECD view as reported in the OECD Observer, August-September 1995, p. 48.

Suggest the changes in wording that would reflect the consensus view of the appropriate monetary policy in 2003-04.

Lindsay Bur

Numerade Educator

02:33

Problem 2

An investment report opened its 'investment outlook' section with the comment: We expect the global economic environment to be characterised by moderate economic growth and relatively low inflation, a combination which should lead to relatively low interest rates also.

Is this statement referring to (a) the real interest rate, (b) the nominal interest rate, or (c) both? Explain.

Haricharan Gupta

Numerade Educator

03:20

Problem 3

An investment report written in 1996 warned that:
There is a fear that, for political reasons, the UK government will 'go for growth' over the life of this Parliament by increasing spending and cutting taxes while being more lax about interest rates, thus fuelling inflation. That said, the feeling that interest rates have been raised at an earlier stage than in previous recoveries improves the likelihood that inflation will be kept under control.
(a) Discuss the extent to which price stability has been achieved in the UK since 1996.
(b) Analyse the extent to which monetary policy of the Bank of England can take credit for this price stability.

Haricharan Gupta

Numerade Educator

02:09

Problem 4

A recurrent theme of the European Central Bank is that 'the best contribution monetary policy can make to growth and employment is to maintain stability in the general level of prices'. Does attaining price stability implicitly mean that interest rates have to be relatively volatile?

Jennifer Stoner

Numerade Educator

02:26

Problem 5

At the end of June 2003, the Federal Reserve cut interest rates by a quarter-point to 1.0 per cent, their lowest level in 45 years. This was the 13 th reduction in shortterm US interest rates, from 6.5 per cent at the start of 2001. Explain the three main channels by which the fall in interest rates would be expected to translate into higher aggregate demand. Comment on their applicability to the US economy during the period 2002-04.

Gregory Shiver

Numerade Educator