8) To avoid the potential devastating effects of deflation combined with an effe

Question

8) To avoid the potential devastating effects of deflation combined with an effective lower bound on (2 interest rates, the textbook recommends which of the following actions on the part of central banks? Significant increases in reserve requirements. O A higher target rate for inflation. Stopping discount lending. All of the above None of the above The relationship between interest rates and stock prices is referred to as: 9) (2pts) The interest-rate mechanism of monetary policy The asset-price channel of monetary policy The wealth-creating mechanism of monetary policy The investment-spending mechanism of monetary policy

Explanation / Answer

q8) The answer is none of the above.The reasons are as follows-

Deflation occurs when supply of money decreases.Increase in reserve ratio leads to less money available for lending by banks.Deflation occurs when there is 0% inflation or very low inflation.Banks usually borrow from Central bank when there is usually liquidity shortfall for temporary period and this is known as discount lending. If this stops short term supply of money will be restricted.

q9) This relationship is known as wealth creating mechanism of monetary policy because interest rate changes can affect financial wealth e.g:- share prices.

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