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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

For aggregate demand shocks and permanent supply shocks, the price stability and economic activity stability objectives are consistent: Stabilizing inflation stabilizes economic activity, even in the short run. For temporary supply shocks, however, there is a trade-off between stabilizing inflation and stabilizing economic activity in the short run. In the long run, however, there is no conflict between stabilizing inflation and stabilizing economic activity.

“Policymakers would never respond by stabilizing output in response to a temporary positive supply shock.” Is this statement true, false, or uncertain? Explain your answer.

Is stabilization policy more likely to be conducted through monetary policy or through fiscal policy? Why?

How does the policy rate hitting a floor of zero lead to an upward-sloping aggregate demand curve?

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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