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Related Flashcards
Cards In This Set
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What is the difference between inflation targeting and targeting with an implicit nominal anchor?
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Inflation targeting focuses on transparency, high accountablity and reduced inflations shocks.
Implicit nominal anchor is a forward looking behavior "preamptive strikes". Demonstrated success in U.S. Avoids time inconsistency problem.
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Which of these policies is used currently in the United States, which is used in countries like Canada and the United Kingdom?
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U.S. uses Implicit Nominal Anchor Check notes on this one????
Canada and United Kingdom use Inflation targeting.
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What are the advantages of inflation targeting?
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Advantages:
Simplicity and clarity of target
Does not rely on stable money-inflation relationship
Increased accountability of central bank
Reduced effects of inflationay shocks
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What are the disadvantages of inflation targeting?
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Delayed signal about achievement of target.
Could impose rigid rule (though has not in practice)
Larger output fluctuations if sole focus on inflation (though not in practice)
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What are the advantages of implicit nominal anchor?
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Does not rely on stable money-inflation relationship
Demonstrated success in U.S.
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What are the disadvantages of implicit nominal anchor?
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Lack of transparency
Success depends on individuals in charge
Low accountablity
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What is an exchange rate?
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The price of currency in terms of another is called the exchange rate
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Appreciation: a currency rises in value relative to another country
When a country's currency appreciates, the country's goods abroad become more expensive and foreign goods in that country become less expensive and vice versa.
EX: The prices of French wine and cheese and the cost of vactioning abroad all rose as a result of the weak dollar.
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What is the difference between a spot and a forward exchange rate transaction?
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Spot exchange rate: Immediate (two day) exchange of bank deposits.
Forward exchange rates transactions: involve the exchange of bank deposits at some specified future date.
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Forward exchange rate?
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Is the exchange rate for the forward transaction
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What is the money multiplier?
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A ratio that relates the change in the money supply to a given change in the monetary base.
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What is the multiplier?
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C
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What is the velocity of money?
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The concept that provides the link between M and PXY is call the Velicity of money (Often reduced to velocity).
The average number of times per year (turnover) that a dollar is spent in buying the total amount of goods and services produced in the economy.
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Velocity of money formula:
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V= P X Y/M
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Velocity is not constant.
The procyclical movement of interest rates should induce procyclical velocity.
Velocity will change as expectations about future normal levels of iterest rates change
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