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courses/ECO202124103213/Assignment\%209.pdf
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3. Suppose you are the head of an independent central bank charged with holding inflation and unemployment low and steady. For each of the situations listed below, decide if you would use Easy-Money policy, Tight-Money policy, or do nothing, and briefly explain why.
Easy-Money policy (expansionary monetary policy): You are trying to grow the economy and create more jobs by increasing the money supply, usually by lowering the discount rate for lending to commercial banks, or by buying government bonds or other securities through open market operations.
Tight-Money policy (contractionary monetary policy): You are trying to slow the economy down in order to fight inflation or prevent the economy from over-heating, creating a bubble, and then collapsing later. You would do this by reducing the money supply, usually by raising the discount rate or by selling government bonds or other securities through open market operations.
Do nothing: Keep monetary policy the same, as changing policy will not improve things.
a. GDP growth rates have increased from 1 percent to 5 percent in the last year.
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b. Stock prices have declined sharply for the last three weeks. Investors are panicking.
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c. In the last 3 months, although the central bank has not changed the interest rate target or other monetary policy, commercial interest rates for business loans have been rising sharply.
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d. The price of rice has more than doubled in the last year.
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e. Because of rising costs of imports, the country has been experiencing high inflation. At the same time, the unemployment rate has been rising sharply.
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f. Unemployment is rising, factory orders are down, and investment appears to be slumping.
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g. Investment is high, the inflation rate is rising, and people are talking about a bubble economy.
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h. The housing market has crashed. Many loans have gone into default, and the business comminity suspects that some banks have become insolvent (have negative asset value).
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i. Unemployment has fallen to historic lows, but the inflation rate appears to be holding steady at \( 2 \% \).-
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