Lod 3 page 381 a head stability the primary objective

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Financial Markets and Institutions
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Chapter 5 / Exercise 4
Financial Markets and Institutions
Madura
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LOD: 3 Page: 381 A-Head: Stability: The Primary Objective of All Central Banks.Cecchetti: Money, Banking, and Financial Markets453
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Financial Markets and Institutions
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Chapter 5 / Exercise 4
Financial Markets and Institutions
Madura
Expert Verified
Chapter 15 Central Banks In the World Today89.What may be the reasons that explain the observation that during periods of hyperinflation economic growth actually slows or even contracts? Answer: Periods of hyperinflation or highly unstable prices almost always result from having too much money available. During these periods individuals are trying to cope with the crisis and not putting their efforts into producing goods and services efficiently. In fact from an earlier chapter we learned that one of the roles for money is to serve as a means of exchange, which facilitates exchange and minimizes the time individuals need to spend searching or creating the double coincidence of wants. When hyperinflation or unstable prices occur this causes people to revert to bartering or real goods and services, which means more time spent trading and less time spent producing. In addition, lending and borrowing presents far more risk during periods of unstable prices so less investment in the economy will occur which will also reduce economic growth. LOD: 2 Page: 382 A-Head: Stability: The Primary Objective of All Central Banks.90.If one of the specific goals that central bankers focus on is economic growth, should they aim for the highest short-term growth rate the economy can achieve? Explain. Answer: Central bankers do have economic growth as one of their goals, but the goal really focuses on the maximum sustainable or sometimes referred to as full potential growth rate. A sustainable growth rate is one that can be achieved using the resources available in a reasonable way. The growth of output then is determined by the growth of the inputs and technology, or from principles, the concept of the production function. If central bankers try to push growth above the sustainable level the likely result would be high inflation and a period of below average growth. LOD: 2 Page: 383 A-Head: Stability: The Primary Objective of All Central Banks.454Cecchetti: Money, Banking, and Financial Markets
Chapter 15 Central Banks In the World Today91.We have a country, Fantasyland, where the current per capitareal income is 20,000 units of output, and the current average growth rate is 2.0 percent. What will be the difference in the standard of living twenty years from now if Fantasylandgrows at a rate of 3.5 percent and we assume population is constant? Answer: We can use a financial calculator or exponents to determine the answer. For example, if we enter 20,000 as the current present value, and use a growth rate of 2 percent as an interest rate and the time period of 20 years, our future value will be 29,719 units. At a growth rate of 3.5 percent, the future value will be 39,796 or almost double. This shows the large impact that relatively small differences in the growth rate can have over long periods of time.

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