in its slump during the 1990s. The current crisis led to major failures and bankruptcy of many large banks and financial services such as Lehman Brothers‚ Northern Rock‚ Bradford and Bingley…and result in a liquidity crisis which reduce demand. This is somewhat similar to what the liquidity trap did in the Japan’s slump. Therefore‚ once again the argument about price and wage flexibility being the solution for the current situation is consolidated. Thus‚ how does the flexibility of wage and price correct
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Central Banks around the world have been carrying out expansionary policy (quantitative easing) through open market operations since the start of the financial crises. Explain the purpose of this policy and discuss potential risks associated with it. Describe the impact on output‚ unemployment‚ interest rates and prices in the short and medium run. How effective do you expect this policy to be and what factors does its efficacy depend on? With the emergence of recent financial crisis‚ economies
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.............................. 3 THE EFFECT ON THE AUSTRALIAN ECONOMY (AND GLOBALLY) .......................................... 4 APPENDIX A THE LIQUITY TRAP AND OTHER RISKS OF QE AND POTENTIAL SOLUTIONS ................................................................................................................... 6 THE LIQUIDITY TRAP ...................................................................................................... 6 DANGERS‚ DRAWBACKS AND RISKS OF QUANTITATIVE EASING
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Quantitative easing is often suggested as a solution to a liquidity trap‚ in other words a liquidity trap is a situation in which prevailing interest rates are low and savings rates are high‚ making monetary policy ineffective. In a liquidity trap‚ consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon raise. Because bonds have an
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2 7 Fiscal Policy: the Social Loss Function‚ Automatic Fiscal Stabilizers‚ Deficits‚ government debt‚ Debt trap‚ crowding-in and crowding – out effects of deficits 2 8 Monetary Policy: definition‚ functions of money‚ M1‚ M2‚ M3‚ money-demand‚ money-supply‚ money multiplier‚ market interest rates‚ policy rates; Monetary policy instruments and their limitations‚ Liquidity trap 2 9 IS-LM curves‚ goods market and money market simultaneous equilibrium‚ shifts in IS-LM‚ monetary accommodation
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graphically the equilibrium in the money market. 9. Discuss how the liquidity preferences function reflects the 3 Keynesian motives for holding money. (5 marks) 10. What are the main elements of domestic aggregate demand? What is aggregate domestic demand equal to money equilibrium? (5 marks) 11. Explain the loanable funds theory of interest. (30 marks) 12. Explain & illustrate graphically the liquidity trap phenomenon and explain the consequences for the practice of monetary policy
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The FOMC is composed of twelve members and their meetings occur eight times a year. In these meetings‚ the monetary policy is voted on and decided by the members. The new changes are announced after the FOMC meeting. I think that the Fed policy decision by next FOMC meeting is important because based on their decision we know what will happen to interest rates. The expected change in rate is often priced into the markets before the announcement‚ so this can cause a drastic market action if the announcement
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CHAPTER 11 MONETARY AND FISCAL POLICY Chapter Outline: • The effects of fiscal and monetary policy on output • Monetary policy and the transmission mechanism • The liquidity trap • The classical case • The quantity theory of money • Fiscal policy and crowding out • Monetary accommodation • The effects of alternative policies on the composition of output • The U.S. economy in the 1980s and 1990s • Anticipatory monetary policy • The policy mix during the German re-unification
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Therefore‚ the measures adopted since mid-September have tended to regenerate the liquidity and solvency of these institutions. This has required strong intervention of public sectors such high amounts that were unimaginable until now. Specifically‚ to improve liquidity the public sector decided to guarantee the obligations of financial institutions‚ with some variations between countries‚ increased the amount of deposit insurance
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Monetary policy is the monitoring and control of money supply by a central bank‚ such as the Federal Reserve Board in the United States of America‚ and the Bangko Sentral ng Pilipinas in the Philippines. This is used by the government to be able to control inflation‚ and stabilize currency. Monetary Policy is considered to be one of the two ways that the government can influence the economy – the other one being Fiscal Policy (which makes use of government spending‚ and taxes).[1] Monetary Policy
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