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Chapter 24: Q. 24 (page 655)

What nonconventional monetary policies shift the aggregate demand curve, and how do they work?

Short Answer

Expert verified

Actual interest rates and credit score gaps are reduced as a result of nonconventional monetary policies.

Step by step solution

01

Concept Introduction

Nonconventional monetary policies aim to increase the value and supply of foreign capital to economic and non-financial organizations.

Investment interest rates are determined by economic internal conflicts and tight interest rates set by the central bank.

02

Explanation

Privately issued securities are bought in nonconventional monetary policy, which reduces the credit gap and economic tension; however, when private assets are purchased by the central banking system, the price of the securities rises. This increase in the cost of securities lowers interest rates, lowering monetary friction and credit gap, which lowers actual-interest rates for investments. The lower actual interest rate for investment causes a rightward shift in the aggregate demand curve, which causes both increased inflation and output.

03

Final answer

As a result of the nonconventional monetary policy, actual interest rates and credit gaps have decreased.

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Most popular questions from this chapter

Why do temporary negative supply shocks pose a dilemma for policymakers?

In 2003, as the U.S. economy finally seemed poised to exit its ongoing recession, the Fed began to worry about a 鈥渟oft patch鈥� in the economy, in particular the possibility of a deflation. As a result, the Fed proactively lowered the federal funds rate from 1.75% in late 2002 to 1% by mid-2003, the lowest federal funds rate on record up to that point in time. In addition, the Fed committed to keeping the federal funds rate at this level for a considerable period of time. This policy was considered highly expansionary and was seen by some as potentially inflationary and unnecessary.

  1. How might fears of a zero lower bound justify such a policy, even if the economy was not actually in a recession?
  2. Show the impact of these policies on the MP curve and the AD/AS graph. Be sure to show the initial conditions in 2003 and the impact of the policy on the deflation threat.

鈥淧olicymakers would never respond by stabilizing output in response to a temporary positive supply shock.鈥� Is this statement true, false, or uncertain? Explain your answer.

How can demand-pull inflation lead to cost-push inflation?

For each of the following shocks, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a longrun equilibrium.

a. Consumers reduce autonomous consumption.

b. Financial frictions decrease.

c. Government spending increases.

d. Taxes increase.

e. The domestic currency appreciates.
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