Q.18 How can the long-term bond marke... [FREE SOLUTION]

Chapter 19: Q.18 (page 528)

How can the long-term bond market help reduce the time-inconsistency problem for monetary policy? Can the foreign exchange market also perform this role?

Short Answer

Expert verified

The long-term bond market provides the data regarding the changes within the price of the bond. The monetary policy contains a direct impact on the worth of the bond under this market. Yes, the interchange market also can perform this role as more expansionary monetary policy would mean a decline within the value of the currency which is same because the decrease within the price of the bond.

Step by step solution

Concept Introduction

Long-term bond market refers to the financial market where long-term bonds is bought and sold. the first objective of this market is to supply long-term funding through bonds for public and personal expenditure.

Explanation of Solution

The long-term bond market provides the data regarding the changes within the price of the bond. The monetary policy contains a direct impact on the worth of the bond under this market. The more expansionary monetary policy will cause decrease within the price of the long-term bonds thanks to the negative relationship between monetary resource and price. So, it helps in reduction within the time inconsistency through expanding and contracting the monetary policy.

Yes, the interchange market also can perform this role as more expansionary monetary policy would mean a decline within the value of the currency which is same because the decrease within the price of the bond.