# Monetary Policy - The Equations

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2016-01-07 16:05

## Section

Question | Answer |
---|---|

Why is the dynamic IS 'an IS curve'? | As it show the combinations of output gaps and the real interest rate that is consistent with equilibrium in the final goods market |

Why is the dynamic IS 'dynamic'? | As the output gap at time 't' depends upon future expected output gaps |

What is the direct channel of Monetary Policy? | The idea that the monetary authority can directly change real interest rates through nominal interest rates because of the sluggish nature of prices |

What is the expected channel of Monetary Policy? | The idea that economic activity can be influenced today by manipulating expectations of future short-term real interest rates |

Why is the forward-looking Phillips Curve 'a Phillips Curve'? | As it shows the short-run trade off between economic activity and inflation |

Why is the forward-looking Phillips Curve 'forward looking'? | As current inflation also depends upon future expected inflation rates |

Why is the Monetary Policy Rule 'a rule'? | As it tells the Central Bank how to set nominal interest rates (as well as real interest rates due to the direct channel of monetary policy) for a given state of the economy |

What is the Taylor Principle? | The idea that the coefficient on inflation deviations from target should exceed 1, and the idea that the coefficient on the output gap should be greater than (or equal to) zero |

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