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FOMC & RBA Policy Suggested Responses to Questions in Economics Discussion

I’m working on a economics writing question and need an explanation to help me learn.

This is an individual assignment. Please complete strictly on your own. Questions may have multiple
correct answers. Concise answers are expected and they could also be in the form of bullet points.
Length of answers (for all questions combined) is expected to be around 1000 words and should not
exceed 1500 words. Answers should be in your own words. You should not quote others and since
you are responding in your own words you do no not need to provide references/citations.

Question 1: RBA
Last year, the Reserve Bank of Australia (RBA) dramatically expanded its balance sheet (more than
doubled) with purchases of government debt. This has been criticized as follows: (1) This policy leads to
high inflation; (2) it represents monetization of the debt. Related to this critique, it has also been
suggested that the RBA is no longer operating as an independent central Bank.
Do you agree with these criticisms? Explain why or why not? If you served as advisor to the RBA
governor, how would you suggest he should explain the RBA policy and respond to the critics?

Question 2: Fed meeting on June 16
At its latest meeting, the FOMC published new economic projections, available here:
https://www.federalreserve.gov/monetarypolicy/file…
(i) Did Committee participants change their inflation projections, and if so how?
(ii) Did Committee participants change their unemployment projections, and if so how?
(iii) On the basis of your answers above, would you have expected the FOMC to change its
interest rate policy in June? Its projected interest rate policy for 2022? Explain.
(iv) The FOMC did not change interest rate policy at the meeting. Was this a reasonable decision
or a policy mistake? Explain.

Question 3: ECB and climate change
The ECB has communicated that as part of it its ongoing policy strategy review, it will examine how to
change its policies so that it can better contribute to environmental sustainability. One of the ways it
can do this is by giving preferential treatment to corporations that are “green” (more friendly to the
environment) relative to corporations that are “brown” (less friendly). For example, the ECB purchases
corporate bonds as part of its monetary policy. At present it purchases bonds in a balanced fashion.
(i) A more “green policy” would be to purchase only “green” bonds, thereby penalizing
“brown” companies. If the ECB decides to penalize “brown” corporations in this fashion, it
will have very large distributional effects across industries and across member states. Some
say this is not the role of monetary policy. Do you agree or not? Discuss.
(ii) An alternative way the ECB can use its asset purchases is to provide incentives to state
governments: The ECB can discriminate against states that are the biggest polluters (on a
per capita basis). The ECB is the central bank of 19 member states and some are far bigger
polluters (per capita) than others. To give incentives to governments, the ECB can stop
purchases of government debt of, say, the worst 5 polluting states, and buy relatively more
government debt of the 5 least polluting states. This would certainly give governments the
incentives to adopt green policies, and fast. But some say this is not the role of monetary
policy. Do you agree or not? Discuss

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