To keep inflation low and steady, central banks would like to keep output reasonably close to its potential level, but can they anticipate changes in potential GDP? Plot since 1960 the percent change from a year ago of the Congressional Budget Office’s estimate of potential GDP (FRED code: GDPPOT). Suppose that the FOMC assumed that the growth rate of potential GDP remained permanently at its 1960s average. What would you expect to happen to inflation? Why?
Answer to relevant QuestionsIf 2 percent growth is your break-even point for an investment project, under which outlook for the economy would you be more inclined to go ahead with the investment: (1) A forecast for economic growth that ranges from 0 to ...Explain in detail how monetary policy influences banks’ lending behavior. Show how an open market purchase affects the banking system’s balance sheet, and discuss the impact on the supply of bank loans. Describe the theory of the exchange-rate channel of the monetary transmission mechanism. How, through the exchange rate, does an interest rate increase influence output? Why is this link difficult to find in practice? Explain why the traditional interest-rate channel of monetary policy transmission from monetary policy actions to changes in investment and consumption decisions may be relatively weak. How important is the balance sheet channel of monetary policy? Plot since 1996 the net tightening of credit standards for consumer and credit card loans (FRED code: DRTSCLC) and (on the right scale) household net worth (FRED ...
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