Discussion week 9 Banking and movement of capital
Please answer each discussion with 250 -300 words, APA style. DO NOT FORGET THE
CITATION!!!! Then write a response to 2 students for each discussion week with 100 words
min, and directed at them in a positive manner not in 3rd person! The other students
discussion posts can also be used as an example on how your initial post should be done.
So by the end of this assignment your should have done 1 discussions and 2 responses!!!
Discussion question
1. What is an expectation trap? If people thought that the central bank was likely to raise the
inflation rate to 3 percent from 2 percent, how might that lead to an expectations trap?
2. How can the Central bank establish credibility for keeping inflation low?
3. Why have rules for monetary policy based on money growth been unsuccessful in recent years?
4. Why is the inflation report such an important part of an inflation-targeting system?
5. why don’t policymakers want to adopt rules for monetary policy?
Student response I will post those once I received the initial discusssion
posting since I cant see others post until I post and I will then extend time for
24 hours.
Student 1 Peter ( needs a response directly at him not in a 3rd person, what u
like about his post or agree with or disagree with, stay positive)
Student 2 Simon ( needs a response directly at him not in a 3rd person, what u
like about his post or agree with or disagree with, stay positive)
Discussion week 9 Banking and movement of capital
Please answer each discussion with 250 -300 words, APA style. DO NOT FORGET THE
CITATION!!!! Then write a response to 2 students for each discussion week with 100 words
min, and directed at them in a positive manner not in 3rd person! The other students
discussion posts can also be used as an example on how your initial post should be done.
So by the end of this assignment your should have done 1 discussions and 2 responses!!!
Discussion question
1. What is an expectation trap? If people thought that the central bank was likely to raise the
inflation rate to 3 percent from 2 percent, how might that lead to an expectations trap?
2. How can the Central bank establish credibility for keeping inflation low?
3. Why have rules for monetary policy based on money growth been unsuccessful in recent years?
4. Why is the inflation report such an important part of an inflation-targeting system?
5. why don’t policymakers want to adopt rules for monetary policy?
Student response I will post those once I received the initial discusssion
posting since I cant see others post until I post and I will then extend time for
24 hours.
Student 1 Peter ( needs a response directly at him not in a 3rd person, what u
like about his post or agree with or disagree with, stay positive)
1. An expectation trap occurs when there is a hyped expectation of rising inflation, and there is
no choice but to raise the inflate rate to the expected level. This particular situation forces the
central bank to implement certain policies regardless if they were going to implement them or
not. In this situation the people’s expectation is what chose to implement the policy, and causes
the central bank to re-evaluate their decisions. To avoid an expectation trap from occurring, the
central bank would have to decrease the expectation of increased inflation.
2. The central banks can establish credilbility for keeping inflation low in a few ways.
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•
•
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The first being the central bank needs to only have one goal for the organization, which would
be to maintain low inflation.
Offer the central banks more independence to help reduce the level of pressure from outside
sources to increase output.
They can also choose very conservative members to run the central banks.
They can gain their reputations with time and consistent positive performance of keeping
inflation low.
3. The money-growth rule has failed several times since 1987 because there are inconsistency
between the model and the results. There have been several incidents noted about financial
innovation changing the relationship between money and other variables. Originally the
economists were using the M1, but there were very strong difference between M1 growth rate
and M1 velocity growth rate. The economists eventually started to focus on the M2 growth to
get a better focus around the rule, but eventually it became worthless after the 90s. There were
more inconsistencies between expected and actual.
4. The inflation report is very popular among the public and the users to help get an idea of what
type of inflation that is expected. The central bank initially assumed the inflation report would
reveal too much and make it harder to implement policy. In contrast, the inflation report actually
helped the public understand the goal, and to guide their expectations to help avoid an
expectation trap.
5. Policymakers don’t want to be tied to rules for monetary policy mainly because they are afraid
of structural change that could cause the rule to work improperly. A more acceptable idea is to
have many recommendations of rules to see which advice to give. This idea would also need to
give the policymakers the freedom to make policy adjustments to respond to structural changes.
Peter
Croushore, D. D. (2015). M & B³. Stamford, CT: Cengage Learning.
Student 2 Simon ( needs a response directly at him not in a 3rd person, what u
like about his post or agree with or disagree with, stay positive)
1.
2.
3.
4.
What is an expectation trap? If people thought that the central bank was likely to
raise the inflation rate to 3 percent from 2 percent, how might that lead to an
expectations trap?
An expectation trap is the central bank or policymakers have to raise the inflation to fit in
with the need of people’s expectation (Croushore, 2015).
An expectations trap tends to be happened when people expect the policymakers tend not
to tighten the money supply before the election so that it will help politicians win the
election or the policymakers tend to ease policy when the output slows down and
policymakers are not aware of it (Croushore, 2015).
How can the Central bank establish credibility for keeping inflation low?
The Central bank can establish credibility for keeping inflation low (Croushore, 2015):
Central bank aims to keep large output and low unemployment
Central bank can pick the very low risk takers as the policymakers, so the main function is
to keep the inflation low
Central bank develop “reputation” to keep low inflation for a long period time
Central bank promises to act in “certain way”
Why have rules for monetary policy based on money growth been unsuccessful in
recent years?
According to the money growth, monetarists believe money growth is linked with the
inflation in the long term and the demand of money tends to be certain over a period of
time so the policymakers can establish the money supply in the long run (Croushore,
2015).
However, the rules for monetary policy based on money growth have not been successful
in the recent years (Croushore, 2015):
1. The actual velocity growth was not as expected by Fed in the early 1990s.
2. The inflation had been low between 1995 and 2001 but the growth of M2 had been
increased a lot during this period.
Why is the inflation report such an important part of an inflation-targeting system?
The inflation report is important part of in inflation-targeting system as it is served as a
communication tool so that the public can understand how the central bank works and the
policy can be executed easily (Croushore, 2015).
Why don’t policymakers want to adopt rules for monetary policy?
The policymakers do not want to adopt rules for monetary policy since they worry there is
structural change and there is more flexibility in establishing policy. Also, economists are
concerned about the human would make the inflation even higher than it is expected
(Croushore, 2015). For instance, the monetary policy based on the money growth did not
work in the early 1990s as the velocity growth was not that high and the inflation was low
between 1995 and 2001 even the M2 had been grown a lot (Croushore, 2015). Also, Fed
used Taylor rule which moved the federal funds rate in response to the output gap or
inflation gap assuming the equilibrium real federal funds rate remained unchanged in
certain period, but it did not work well when there was technological improvement and the
equilibrium real federal funds was increased in the second half of 1990s (Croushore,
2015). Therefore, the policymakers tend to review all the rules to develop a policy so that
the policy can weigh in the structural changes or changes in the situation.
Reference
Croushore, D. (2015). M & B 3 Bundle: M&B 3, (3rd ed.). Cengage.
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