MONETARY

POLICY

1. Fill in the gaps with the appropriate words.

Modern central banks influence economic developments by steering a short-term interest rate.
This rate is also referred to as the nominal interest rate, because it serves as an important indicator for the
economy. Central banks use this interest rate to influence inflation and output gap .

2. Which statements are correct? Which are not? Please briefly explain your answer.

 All occurrences – besides past events and monetary policy effects – that have either a positive or negative
impact on the economy can be exactly determined.

This isn’t correct as they cant be exactly determined but rather just predicted to a certain
degree.

 Discrepancies may arise between the two objectives (price stability and balanced economic activity).

This is true as sometimes in order to achieve long term stability some price stability needs to be
lost

 Inflation reacts immediately to interest rate adjustments.

Not immediately sometimes certain choices with the interest rate may effect the inflation in the
long term

3. Explain the following key terms from Mopos in your own words.

Nominal interest rate the interest rate which banks can manipulate in order to change the output gap and inflation
rate.

Inflation
By how much more or less money is worth this changes every year and depends on the
economical choices of the country

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Output gap

It is the measurement of how much the economy can output and how much it actually is.

Shocks

Certain random events which may greatly effect the inflation rate and the output gap.

4. Explain in a few sentences how inflation and economic activity develop if the central bank raises the interest rate –
and all other conditions remain unchanged.

If the interest rate is put up, then inflation rate will drop. And the output gap will drop as well
this can be good sometimes however it can also be very bad as the interest rate may rise too
high or drop too low.

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2017
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POLICY

5. A central bank’s decision is based on uncertainty. Explain in a few sentences what this statement means.
The central bank isn’t certain in almost any decision they make. This means that sometimes certain
decisions are made without 100 percent support of it being a good decision and instead a lot of data is
analyze in order to try and predict the outcome of the change.

BONUS QUESTION

Simulations always present a more or less simplified version of reality; Mopos is no exception. Give two examples of
simplified versions of reality in Mopos, which are actually of great importance for conducting monetary policy
(and which can make it easier or more difficult). Explain your examples in a few sentences.

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2017