MGT411 GDB Solution & Discussion Fall 2017
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MGT411 Gdb solution
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Answer # 1
Central banks has privileged that they occupies monopoly power. Most central bank goes about this by adjusting short term interest rates an activity called monetary policy. Central banks use monetary policy to stabilize economic growth inflation. An accommodative policy raises growth and inflation tighter or Restrictive policy reduces them. Government wants to control the printing of money because it is a very profitable business, losing the control of the amount of currency means losing control of inflation. The inflation rate is 6% is not average rate of interest because high standard deviation would be more harmful to the economy as compared the Iow rate of inflation. Because the best rate of inflation is 2% in every field of inflation.
Answer # 2
Low Inflation, It becomes hardened than expected for people to pay back their debts; they have to spend a higher percentage of income on debt repayments leaving less income for other spending. Fall in inflation increases interest rates. Whether we like it or not rising real interest rates make it less attractive to borrow or invest. It encourages consumer to save if the economy is depressed. This rise in real interest rates can make monetary policy less effective in encouraging growth. Falling prices can encourage people to delay buying luxury goods they feel they need to wait a year because prices will be lower. A normal period of economic growth would give moderate rate of inflation (2%). If Inflation has fallen to 0%. It suggests that there is intense price pressure to encourage spending and the recovery is very fragile.