ch 5 - CHAPTER 5 Monetary Policy 1 2 Impact of Monetary...

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1 CHAPTER 5 Monetary Policy
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2
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3 Impact of Monetary Policy Correcting a Weak Economy Fed can stimulate the economy by creating a loose-money policy through OMO, how? Correcting High Inflation The Fed can constrain economic activity when it creates a tight-money policy, how?
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4 Correcting a Weak Economy
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5 Correcting High Inflation
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6 Limitations of Monetary Policy Impact of the Credit Crunch Loose Monetary Policy Uncertainty →higher credit risk →less loans Restrictive Monetary Policy Higher interest rates make loan payments unaffordable
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7 Limitations of Monetary Policy Lagged Effects of Monetary Policy Recognition Lag Implementation Lag Impact Lag
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8 Limitations of Monetary Policy Theory of Rational Expectations Simulative Policy→ Increased Inflation
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Tradeoff in Monetary Policy There is an inverse relationship between inflation and unemployment When inflation is high, tight money policy is considered Tradeoff is higher unemployment
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ch 5 - CHAPTER 5 Monetary Policy 1 2 Impact of Monetary...

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