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The Monetary Policy of the Ecb

In: Business and Management

Submitted By desitka
Words 736
Pages 3
Assignment 1
1) From previous studies we know that a monetary expension leads to higher level of real GDP and higher price level.In this case, the endogenous veriable Y increases its value, from Y to Y1. The price level also goes up from P to P1, as shown in the AS-AD model under, in which the aggregate demand (rapresented by the AD curve) reaches a higher level.

In the LM-IS model a monetary expansion policy makes the LM curve move rightward, from LM to LM1, which means a lowering in the interest rate and an increase of real GDP, from Y to Y1, in the short run.

2a) ε=0,5 M0=1Ɵ*1*H M1=1Ɵ*0,5*H
If the banking sector is not efficient the money supply decreases from M0 to M1, whose amount after the crisis is half of the the one before.
Referring to AS-AD model, the aggregate demand curve moves rightward, but less than in the case without any crisis (ε=1), and the same happens to the LM curve. There will be an increase in Y and P, a decrease in i but all these changes will be smaller than in the other case. What has been described above is the short term effect. In the medium run there will be an adjustment that leads the LM curve back to its previous position.

2b) The ECB has two tools to counteract the effect of a decrease in efficiency of commercial banking sector. It can change the minimum reserve requirements (mrr) or the the monetary base.
In the first case, with ε=0,5, ECB can cut the mrr of half, as it comes from
1xƟ*ε2*H=1Ɵ*ε*H => x=12.
The ECB can otherwise increase H, expanding the monetary base through open market operations. The amount of that expansion is derived from
1Ɵ*ε2*xH=1Ɵ*ε*H => x=2
That means doubling the monetary base H.
2c) Yes it had. The economic turndown led the M growth to a negative level in 2010, and it’s crystal clear how the strategies put in practice by the...

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