how to analyze this kind of situation? a un-anticipated shift to expansionary monetory poilcy will reduce interest, less foreign capital inflow, so less demand to local currency, currency depreciation. what happen if the shift to an expansionary monetory policy is expected? Thanks. when the money supply is un expected, is it analyze movement along the SRAS curve without shift it ? Thanks.
An anticipated expansionary monetary policy will also result in lower interest rates and exert a depreciating influence on the currency. When an expansionary monetary policy is not expected, AD will shift out further to the right than AS shifts back to the left. The result is production temporarily above the long-run level. On the Phillips curve, suddenly we have higher inflation than expected. The result is temporary lower unemployment. The two frameworks are consistent, as we have temporarily higher than equilibrium output and lower than equilibrium unemployment.
I am confused about analyze the situation when certain thing is un expected. should we just move along the curve instead of shift curve? Thanks. chebychev Wrote: ------------------------------------------------------- > An anticipated expansionary monetary policy will > also result in lower interest rates and exert a > depreciating influence on the currency. > > When an expansionary monetary policy is not > expected, AD will shift out further to the right > than AS shifts back to the left. The result is > production temporarily above the long-run level. > On the Phillips curve, suddenly we have higher > inflation than expected. The result is temporary > lower unemployment. The two frameworks are > consistent, as we have temporarily higher than > equilibrium output and lower than equilibrium > unemployment.
Well when referring to equilibrium in the capital markets, an increase in money supply will decrease interest rates. Then look at the AS/AD model. Knowing that interest rates decrease will increase business investment and increase consumption as individuals will finance purchases at the new lower interest rate. This shifts the AD curve to the right and all those effects mentioned above relating to the philips curve and AD/AS take place. Also, just intuitively, if interest rates in our country decline, you’re going to move your investments to a place where the rate of return is higher…say Canada (whose interest rate is now higher than the US). To invest in Canada you are going to sell your U.S. currency and buy Canadian currency which will cause the U.S. currency to depreciate and the Canadian currency to appreciate relative to the US dollar.
What’s being anticipated is the inflationary effect of more money at a lower cost. This will keep *real* rates the same. You can look at a couple of groups for effects: borrowers/lenders and buyers/sellers. Once the policy is underway and you have money being pumped into the economy, everyone will be on alert for inflation and they will raise their expectations for it. This will cause borrowers to want to borrow at the current low (i.e. pre-inflation) rate and will also cause lenders to not want to lend. They have incentive to wait until rates start to rise. This tension will raise rates as long as demand is there, but the *real* rates won’t change. Buyers and sellers behave much the same way. Buyers will prefer to buy goods at the now-price and sellers would prefer to sell later (or at premium prices now). AD inches up while AS inches down, the result being higher prices. So the money effects are about the same between anticipated and unanticipated. The difference is that real rates remain unchanged in the face of accurate anticipation, meaning that the long-run effects are not the same. Anticipated changes have little or no effect on real rates in the long-run.
Zeroaffinity, is an implication of the last sentence of your preceding post that the federal reserve cannot alter real interest rates unless it surprises people?
>Zeroaffinity, is an implication of the last sentence of your preceding >post that the federal reserve cannot alter real interest rates unless it >surprises people? That’s broad. I’d feel better if you said that the Fed cannot alter real rates by (1) using monetary policy solely and (2) the economy accurately anticipates the move. Under those constraints, I’d say that it is true the Fed cannot materially affect real rates. However, the Fed could use some other tool than monetary policy, the economy could miscalculate the degree of inflation to expect, or some other set of factors could come into play whereby the Fed effectively alters real rates despite anticipation by the public.
I don’t think the Fed has many tools besides monetary policy…
Hmm, I would be interested in people’s thoughts on this. I would think that if the federal reserve announced that it was doubling the discount rate overnight, and then did so, other rates would be affected. Similarly, I would think that if the fed announced that it was going to double the amount of treasury securities in circulation over the next week, and then it actually did so, interest rates would be affected. Perhaps I’m missing something though.
Announcing that you’re doubling some rate overnight seems out of line with your first what-if related to anticipated changes. Several hours notice is not a lot of time for an economy to adjust. You’re asking a different question now.