• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Assuming conditions of uncertainty, how would you employ monetary policy to stabilise the economy where instability originates in a) the goods market b) the money market.

Extracts from this document...

Introduction

Assuming conditions of uncertainty, how would you employ monetary policy to stabilise the economy where instability originates in a) the goods market b) the money market. Lecture notes 30/10/03 Plan Intro What is uncertainty? What is monetary policy? A) Goods market B) Money market Conclusion What is uncertainty? We do not know the position of the IS or the LM curve, we obtain different results depending on whether the instability originates in the goods market or the money market. If the instability is in the goods market we do not know the position of the IS curve, if the instability is in the money market we do not know the position of LM curve. In terms of monetary policy we have two alternatives, pursuing a Money Supply target or pursuing an interest rate target. A) Goods market instability When instability originates in the goods market we do not know the position of the IS curve. Interest rate target Money supply target When the IS curve shifts due to a rise or fall in investment due to a change in expectations, rise or fall in income/ output will cause changes in the demand for money. ...read more.

Middle

Money supply target In the diagram: Money demand falls- excess supply- people buy bonds - LM shifts right - increase income- decrease interest rate Money demand increases- excess demand- people sell bonds - LM shifts left- decrease income- increase interest rate In each case (increase and decrease money demand), the excess (money demand and money supply) will give rise to transactions in bonds, causing interest rate and income to change. Interest rate target With an interest rate target the central bank varies the money supply (by buying and selling bonds) at a chosen interest rate so that changes in money demand are met. The LM schedule is horizontal and does not shift when there is a shock of money demand, so there is a stable equilibrium with an interest rate target. Therefore there are no effects in the goods market, so that Y is maintained at its previous level. Therefore there is a constant equilibrium point of Y (shown on diagram). For example, negative shock: if money demand fell, there would be an excess money supply. ...read more.

Conclusion

In the IS-LM model, assets are split into 2 groups: one termed money and one composite, nonmoney asset termed bonds. Any factors that change the relative desirability of the 2 assets shifts the LM curve. The implication for the actual economy is that when the predominant source of uncertainty centres on shifts in asset demands (for bonds and money), the r target is superior. I don't think this bit now is that relevant for this particular question, but it's in our notes and if you don't have the notes from the last diagram you might not have this either: Normally associate: * Monetarists with money supply target and use of monetary policy passively * Keynes with interest rate target and use of fiscal policy actively Our analysis would support the monetarists as they argue money demand is stable but goods market subject to unpredictable shifts (shocks). Keynes fears goods market instability because of volatility of investment due to changing expectations under uncertainty, so Keynes should employ a money supply target. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Supply side policy.

    - promoting free trade and free movement of goods, services, labour and capital throughout the fifteen member nations of the European Union. Measures to encourage small business start-ups Small businesses are the lifeblood of the economy. According to the Department for Trade and Industry, there were an estimated 3.7 million active businesses in the UK at the start of 1999.

  2. Outline the main features of a market economy and compare it to a Command ...

    there alternative to chose from so the public must have that poor quality good. This can also lead to shortages as if not enough of a product is produced then there is no alternative for consumer to turn from. In a free-market economy incentive and self-interest means that there are

  1. UK Membership of the European Monetary Union.

    has to be within 2% of the average of the best performing three. * Budget Deficits have to be below 3% of GDP * The ratio of public (Government) debt to GDP has ot be below 60%. Arguments Against the Euro * One Size does not fit all - the

  2. Chinese economy sets for soft landing in 2005.

    Wednesday's executive meeting of the State Council called for continuous efforts in the following areas in the present stage: -- Curb the fast growth of bank loans; -- Step up control over land management; -- Strengthen the management of grain market; -- Be well prepared for fighting floods and droughts;

  1. Bellway Plc is a holding company with subsidiaries; its main subsidiary company is Bellway ...

    This will increase liabilities and decrease current assets. In addition, expense will increase. 4. Stock Market Analysis Overall, Bellway has outperformed the FTSE All-Shares and FTSE 350 Construction & Building Material sector with similar price23 movement pattern as the sector.

  2. Environmental Analysis Of Landis Lund.

    (Also known as Planned Economies). Every citizen works for the country, there is no unemployment as there is always something to be done. The exclusive way in which the government controls the economy can cause great inefficiencies. It is perceived that the government are experts in business and therefore have the ability to make fundamental economic decisions.

  1. The Quest for Optimal Asset Allocation Strategies in Integrating Europe.

    conclude that periods of free capital flows are associated with high correlations. Various authors support these presumptions with empirical research. For example, looking at the EMU correlations, Rouwenhorst (1999) finds that both country and sector correlations are increasing over time in the period of 1978-1998, although the average increase is not as pronounced for sectors as it is for countries.

  2. Monetary policy of a globalised economy

    The scope has been limited due to the researchers lack sufficient knowledge on various concepts involved in the topic. However the focus has been to study and present the monetary policy in a simplified manner. RESARCH QUESTIONS The researcher has not framed any specific research question to study the topic has a whole.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work