Monetary Economics (ECS3701) Selected Examination Questions and suggested solutions [211581]2023

inflation targeting - -a system in which the central bank attempts to achieve a certain rate of change in the overall price level within some period is referred to as -the taylor rule - -implies that the nominal federal funds rate should be increased if there is a positive output gap or a positive inflation gap -disadvantage of inflation targeting - -it reduces the flexibility of the central bank -benefit of following rules other than discretion - -they would not be able to pursue time-inconsistent policies -ATM model of money - -the opportunity cost of holding money is determined by nominal interest rate. If the nominal interest rate declines then the number of days between visits to the ATM and the quantity of money demanded both rise -liquidity preference model - -The model in which money demand and supply determine the nominal interest rate. The nominal interest rate is represented on the vertical axis and the quantity of money is represented on the horizontal axis, hence, the money demand curve sloped downward and the money supply curve is vertical. If the nominal interest rate is higher than the equilibrium interest rate, bond prices will rise and nominal interest rate will eventually fall. The slope of the money supply curve implies that nominal interest rate has no effect on the money supply.