Monetary Transmission Mechanism
7 important questions on Monetary Transmission Mechanism
What is the monetary transmission mechanism according to Lecture 6?
- Chain reaction: OCR decisions affect interest rates, spending, credit, exchange rates, and ultimately inflation.
- Timing importance: OCR changes affect output quickly, while inflation reacts with a delay.
- Expectations and shocks: They shape supply dynamics and demand fluctuations.
Why is timing crucial in monetary policy according to Lecture 6?
- Output effects are immediate following OCR changes.
- Inflation effects appear with a delay.
- Central banks need to plan ahead to mitigate risk associated with these time lags.
How does the AD-AS model explain the impact of OCR changes?
- OCR cuts lead to increased demand (higher output/inflation).
- OCR hikes result in decreased demand (lower output/inflation).
- This model clarifies supply and demand interactions in the economy.
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What role do expectations play in the monetary transmission mechanism?
- If higher inflation is anticipated, firms will increase prices more rapidly.
- This behavior shifts the short-run supply curve upwards.
- Understanding expectations is vital for predicting inflation outcomes.
How do demand and supply shocks differ?
- Demand shocks cause both output and inflation to move in the same direction.
- Supply shocks result in opposing movements for output and inflation.
- Recognizing these differences is essential for economic forecasting.
What complexities arise in an open economy regarding monetary policy?
- Floating exchange rates: OCR hikes strengthen the domestic currency (NZD), adversely affecting exports.
- OCR cuts weaken the NZD, which can benefit exports.
- Understanding these dynamics is crucial for policy effectiveness.
How does the exchange rate amplify monetary policy effects in New Zealand?
- Small and open economy: External trade has a significant impact on economic conditions.
- FX changes (foreign exchange rate changes) strengthen the overall impact of policy decisions.
- Larger economies exhibit less amplification of monetary policy effects.
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