unconventional_monetary_policy.edited.docx

Generally many players in an economy make their

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Generally, many players in an economy make their decisions today based on their expectations. Various players and sectors of the economy form perceptions regarding then future and will make decisions today based on future expectations. For instance, consumers will buy more today if they expect prices to rise in future. That is their buying habits will depend on their inflation forecasts. This perception will increase the rate of inflation today. Similarly, investors will form their investment decisions depending on their projections of future trends of interest rates. In an economic crisis, the investors are likely to hold money if they believe the next direction of interest rates is downwards ( Rogoff 45) . Hoarding money will result in liquidity challenges in the economy, and this will further influence the rate of inflation and slowed economic activity. Forward signaling comes in play at such situations to assure the public that despite the financial circumstances a specific course of action will be undertaken and this influences the economic activities of today towards its desired direction by shaping the future expectations of the public.
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