10. Monetary policy in a liquidity trap ds as long as g questions when the Suppo
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Question
10. Monetary policy in a liquidity trap ds as long as g questions when the Suppose that money demand in problem 9 hol interest rates are positive. Answer the followin interest rate is equal to zero: a. What is the demand for money when the centraltb b. If the central bank cuts interest rate to-0.5%, what is th c. Which central banks have adopted a zero or a sub-zero d. Can you justify the reasons behind the negative interest e. Bank of Japan has been using negative interest rates for the interest rate at zero? effect on the demand for money? interest rate policy? rate policy? Do these reasons always hold in practice? a long period of time. Go to the Web site of the Bank of Japan and check the statistical database (https://www .stat-search.boj.or.jp) to trace the interest rates. Identify the periods when Bank of Japan followed a zero and sub- zero interest rate policy. Check from the same datab how interest rates affect money stock. aseExplanation / Answer
Md = Y x (0.08 - 0.4i)
(a) When i = 0,
Demand for money (Md) = Y x (0.08 - 0) = 0.08Y
(b) When i = -0.5% = -0.005,
Demand for money (Md) = Y x [0.08 + (4 x 0.005)] = Y x (0.08 + 0.02) = Y x 0.10 = 0.1Y
(c) The central banks which have adopted a zero interest rate policy (ZIRP) or sub-zero (negative) interest rate policy (NIRP) are European Central Bank (ECB) and Central Banks of Denmark, Sweden, Switzerland, Bank of Japan and Fed (United States).
(d) NIRP is an unconventional monetary policy tool. It is implemented by making commercial banks pay interest on excess reserves they hold, effectively encouraging banks to lend their excess reserves to increase money supply and boost the economy. This policy is exercised during a recessionary period when economic growth is very slow and conventional monetary policy measures fail or are weakly effective. These reasons do not always hold in practice because the NIRP may send a negative signal about current state of the economy, lowering investor confidence. Also, the money market segment is adversely affected by such a policy measure.
NOTE: As per Chegg Answering Policy, first 4 parts are answered.
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