For me the most important aspect I got after reading the chapter on the financial market and the economy is that inflation is not a bad thing if it can be maintained at a level that it does not influence price level.
Initially I never understood the purpose of bonds in the financial …show more content…
Additionally, I have gap a good knowledge on targeting inflation by manipulating the interest rate to get a steady growth rate while maintaining a stable price level. I am somehow disturbed that a low expectation and pessimism form the society can render the effort of Fed inefficient. Equally, this is similar to the effect of lags which has push central banks to base their policy on data to predict what the future hold and make a decision if it is an inflationary gap or recessionary gap is in the …show more content…
A central bank take is free from political pressure it an ideal policy to enable the central bank tackle economic issue because swiftness is very vital. Once in office revoking their autonomy should not be made easy for the executive and the legislation so as to somehow insulate the pressure of the body on the chairman and the board of governors. Above all it will permit Fed to set its own goals and problem arising from monetary policy can be checked.
Suppose price levels were falling 10% per day. How would this affect the demand for money? How would it affect velocity? What can you conclude about the role of velocity during periods of rapid price change?
Falling price level implies an increase in the value of money. A 10% fall in price equal 1010% increase in the value of money and since consumption depend on the consumer in question the demand for money my increase or decrease. Velocity will be affected only if there is an increase in income which will in turn cause the nominal GDP to change. Change in price level brought about by a change in money supply when real GDP is at its potential level will give a constant velocity for the period. To conclude, change in velocity will offset money supply during the period of rapid price change and disrupt the monetary