Answer to Question #89523 in Macroeconomics for anamika

Question

Supposeyou are recommending monetary policy. The economy is experiencing a sharp and prolonged inflationary trend.a.What change in open market operations would you recommend? (1 mark) b.Explain how the change you advocate would affect the cash rate.(2 marks)c.Explain how the change you advocate would affect the cost and availability of credit.(2 marks)d.Use diagrams/graphs of the money market and also AD-AS to support your discussion

Answer 1

1.I would recommend reducing the nominal short-term rates of the interbank market.

2. This will reduce the medium-term and long-term interest rates on deposits and loans in national currency. That in turn will lead to an increase in investment and consumption, to a decrease in savings. Domestic demand will increase, and this will have a positive effect on the economy.

3. Lowering the refinancing rate leads to an improvement in the liquidity (profitability) of banks, and they can afford to issue more affordable loans to the public and business. The more affordable the money, the more they are going to invest in the economy. As a result, the economy is growing.

Lending is one of the main drivers of economic growth. Thus, lowering the refinancing rate will lead to greater availability of loans and lower cost of credit.