The central bank have two main tools for the stabilization of the economic output over a business cycle: fiscal policy and monetary policy. A fiscal policy means when government adjust spending to stimulate production or taxing used to influence and monitor the economy. Fiscal policy can be used to close the (a) recessionary gap and (b) inflationary gap. Monetary policies are the actions taken by central banks to control the monetary as well as financial status with the goal of attaining low inflation and sustainable growth in the economy. The techniques that are used by the central bank under monetary policies to alter the money supply include the reserve requirements, discount rate, and the open market operations.
Monetary policy ineffective under fixed exchange rates and fiscal policy is more effective under fixed exchange rates. Under fixed exchange rates the governments need to choose macroeconomic policies that are consistent with the fixed exchange rate change. However this is not the case under other exchange rate systems. Monetary policy cannot be applied during recession period. The proponents of expansionary monetary policy state that during the recession if bank reduces the interest rates for consumers to spend more money during a global recession then in that case the export sector would suffer. The fiscal policy changes take a long period of time to enact and yet more time to become operational and effective. Thus fiscal policy must target forecasts of where the economy will be in the future.
How does the Central Bank stabilize the business cycle and what are its limits in doing...
How does the central bank influence the economy in detail? How does the commercial bank influence the economy in detail?
Monitoring Central Bank Intervention 1)How can your business be affected if the Fed attempts to strengthen the dollar in the for-eign exchange market? 2)If the Fed decides to weaken the dollar, how will your business be affected? 3)How can indirect central bank intervention affect your business even if there is no impact on exchange rates? Accessing Central Bank Information Go to the Web site link for the central bank in your target country. Determine whether this central bank intervenes to...
7. The business cycle What Is a Business Cycle and How Does It Affect You? The term business cycle, or economic cycle, describes the pattern of expanding and contracting business activity that an economy exhibits over a period of time. In this context, increasing production and consumption are generally referred to as economic growth, and declining production and consumption are usually called economic contraction. What are the phases of a business cycle? Which of the following statements accurately describe the...
Supposed that the targeted inflation rate by the Central Bank is 3%. However, a positive supply shocks and a contraction of aggregate demand has caused the current level of inflation rate is below than its targeted level. a. Using IS-PC-MR model, explain how the central bank stabilize the inflation rate. b. Discuss the relationship between the central bank preferences with the two strategies to stabilize the inflation rate, namely a ‘cold turkey’ and ‘gradualist’. c. Explain the cost and the...
Government's efforts to stabilize the business cycle through fiscal policy can destabilize the economy due to the presence of: lags in the process of crafting a budget appropriate to the circumstances. a negative interaction between fiscal and monetary policy due to the multiplier effect. a tendency of prices to change faster than the interest rate. business cycles that are closely synchronized to the political cycle.
How does the Federal Reserve System differ from the Central bank in USA?
How does the Federal Reserve System differ from the Central bank in USA?
What Does 200 Million Percent Inflation Look Like? Here’s What Happens When The Central Bank Loses Control. Zimbabwe has been facing 200 million percent inflation. A loaf of bread is a billion Zimbabwe dollars. As you might expect, the US dollar is in short supply there and people are hurting. It relates to sanctions imposed by the West in response to corruption at the highest level of government. On Nov, 21, 2017, Robert Mugabe, the president who ruled Zimbabwe for...
Briefly explain what a central bank is and what its most important task is. Discuss the U.S. central bank, including a brief explanation of what is involved in its decision making about the money supply and its ability to affect some goals of macroeconomic policy; including examples of some macroeconomic policy goals that would be affected. Conclude by explaining what is involved in its policies relating to the money and banking system.
Which central bank has its exchange rate as a focus of its monetary policy? A. Bank of Canada B. European Central Bank C. Bank of England D. Federal Reserve