contemporary issue essay.docx - 15013474 Utilise the IS-PC-MR model to review the policy response to temporary and permanent shocks Critically evaluate

contemporary issue essay.docx - 15013474 Utilise the...

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15013474 Utilise the IS-PC-MR model to review the policy response to temporary and permanent shocks. Critically evaluate the role of credit in this model and explain how might this lead to, and exacerbate, a financial crisis. An essential characteristic of the present monetary policy is that the central bank is advanced in forecasting inflation by examining what is going on in the economy. It takes into account the delays between changes in the interest rate which are used for policy responses. Monetary policy is directed by forecasting for the development of economy but it takes time before it has a full impact on inflation and the actual economy. When three factors are exclusive-what the central bank is hoping to gain, what they think about the limitation it faces from the private sector, and how they apply their policies, and then these information helps the bank to analyse and respond to various shocks in the economy. Shocks can be summarised in a form of a monetary policy model, which is the three equation model or the IS-PC-MR model, a core model of macroeconomics. This model integrates the demand and supply side of the economy and the central bank monetary at any given time. This is produced by adding the Monetary Rule (MR) curve to the (IS) curve from the demand side and (PC) Philips curve from the supply side. The IS curve echoes the demand point of view of the economy as well as in the closed economy and it consists of consumption, investment and government spending. The element of consumption and investment are in a negative correlation with the interest rate, which is set by the central bank whereas government spending is independent. The Philip curve (PC) contemplates the supply side of the economy, which is produced from wage and price setting performances of an economy. Philip curve is the connection between inflation and output pair for a given rate of expected inflation π e as workers bargain wages and companies setting price. The monetary Rule (MR) curve reviews the response of the inflation targeting central bank and it is a mixture of output and inflation that the central bank will choose conditional to the Philip curve it faces. Monetary rule produces the real interest rate the central bank needs to set to help the demand side of the economy in the direction of its objective. The IS-PC-MR graphical breakdown is incredibly helpful in optimizing behaviour of the central government. In order to answer the policy related to permanent and temporary shock it’s very important to understand the graphical flow of the model. To introduce and express the versatility of the IS-PC-MR model we commence with a normal IS curve and a simple Phillip curve. Beginning with an economy where policy maker face a vertical Phillip curve in the median run including in a trade off among unemployment and inflation in the short run. A standard IS curve is shown as a function of the real interest rate which is the short term real interest rate, r
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