Suppose the economy is just recovering from a recession and all signs now point to robust growth. How might this transition from recovery to expansion be reflected in the monetary policy curve?
What will be an ideal response?
The monetary policy curve will have been relatively low, as policy makers kept interest rates as low as possible to hasten recovery from the recession. Once the recession is over, the monetary policy curve will shift up, since low interest rates are no longer appropriate, and to reduce the danger that spending will climb too rapidly and cause inflation to rise. The curve may become steeper, as well, so that any increases in inflation are countered by substantial increases in the real interest rate.
You might also like to view...
Managers (________) may act in their own interest rather than in the interest of the stockholder-owners (________) because the managers have less incentive to maximize profits than the stockholder-owners do
A) principals; agents B) principals; principals C) agents; agents D) agents; principals
If the economy is in a liquidity trap, then:
a. fiscal policy can still stimulate the economy through lower interest rates. b. monetary policy cannot stimulate the economy by lowering interest rates. c. the precautionary demand for money is falling. d. all of the above.