DSST Money & Banking Part 1

Inside lag time between a countercyclical action

Info icon This preview shows pages 9–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Inside Lag  (time between a countercyclical action) consists of  Recognition Lag  (the time from  the need for action and the time the FED recognizes the need – this time could be negative if the  FED could forecast accurately,) and  Administrative Lag  (the lag between the time a need is  recognized and the time the FED takes action by Open Market Operations or other actions) Intermediate Lag:  Lag between both the time and the action is taken by the FED and the effects  on the economy are felt by private agents. Outside Lag  (lag between the time private agents feel the impact of the FED actions and the  time output effects occur,) and consists of:  Decision Lag  (the time it takes the private agents to  decide to alter production), and  Production Lag  (the lag between decision to produce more ant  the time that the impact of production changes occur such as higher output, employment, etc.) Monetarists such as Friedman believe that these lags are long and variable.
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Rational Expectations and the New Classical Theory:  Rational Expectations are so vital that it should play a role in  any theory of how  monetary policy  influenced the economy.  Rational expectations based on all relevant and available  information concerning the variable being forecasted, and have the following characteristics: Not generally perfectly  accurate, they are unbiased (average forecast error is zero), and they are based on the nature of the economic system  involved. Key monetary implication  of the  new classical theory  is that anticipated FED monetary policy changes will  only lead to changes in price levels and inflation rate, but  cannot affect the unemployment rate FED watching: Forecasting Behavior where forecasts are created of FED monetary policy based on a detailed  examination of FED policy decisions. Adaptive Expectations:   based on past experience or forecasts that are revised as data on current and prior  events are received. The  adaptive expectations hypothesis  uses only  past information,  whereas  rational expectations  hypothesis uses both  past and current data. Efficient Markets:  The scare resource of information is being used to its maximum advantage.  General view is  that financial markets are highly efficient and expectations are rational. New Classical Model:   Prices and wages are perfectly flexible  (labor and production markets will always be in  equilibrium),  Expectations are rational  (Firms and employees use all relevant information and make no  systematic errors) Credible Policies:  Believes that the announced policies of the FED will yield immediate results.
Image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern