Econ 311

What is the monetary policy rule?

A systemic, predetermined menu of monetary policy responses to economic conditions

Can you give basic details about the financial crisis and recent recession?

Aggregate demand fell due to the wealth effect because of the fall in housing prices. That lead to the failures of banks and massive changes to monetary policy. It became a liquidity trap as interest rates neared zero but weren't loaned out and stuck in the banks. The Fed took on assets which doubled its asset sheet. Lending was expanded to places that werent financial institutions.

What dictates the AS curve?

Expectations in inflation

What is the Lucas Critique

Changes in policy will lead to changes in expectations. That must be included in models or the models will be incorrect

What is the steady state for AS/AD

Constant inflation and short run output is zero

"Too big to fail"

Description given to large financial institutions Suggests that the government had no choice but to step in and provide liquidity and capital when the banks were in trouble Gain insight into how firms fail under normal circumstances

What is the Taylor Rule

Dictates how much the central bank should adjust nominal inflation in response to inflation and output

How does a risk premium affect that IS/MP and AD/AS diagrams?

Risk premiums add points to interest rates which will ultimately raise the interest rate in AD/AD diagrams

How do you derive aggregate demand curve from IS/MP diagram?

Substitute monetary policy rule ytilda=abar-bbarmbar(pi-pibar)

What is moral hazard?

With bailouts, institutions may undertake excessively risky investments in the future.

What is the zero lower bound and how can this lead to a liquidity trap? What is a deflationary spiral?

Zero lower bound refers to the fact that nominal interest rates cannot fall below zero. When it reaches zero and is paired with deflation it causes a liquidity trap which means the money loaned to banks cannot be loaned any further because people are sitting on the money they have because of deflation. Deflation deepens the recession which leads to more deflation and higher interest rates.

What shifts AD curve?

shocks and changes in central banks inflation target