IS-LM in Liquidity Trap

The IS-LM graphs are typically drawn in such a way that the equilibrium interest is positive. However, in recent years the target (short term) interest rates have declined to zero and cannot go further downward (since nominal interest rates for the most part cannot be negative).

In this situation, equilibrium income is Y₀, and the interest rate is at 0. An increase in the money supply shifts out the LM curve, but cannot further drive down the interest rate. Since interest rates can’t decline, then investments cannot be encouraged by this channel. However, fiscal policy can increase output which would cause a shift outward of the IS curve. Hence, here, monetary policy becomes ineffective, while fiscal policy has quite an effect. _[6]

MNB+Commercial banks (two tier banking system)

MNB-I

Holding and managing official reserves in foreign currency and gold

Developing and monitoring the payment and settlement systems

Issuing Forint banknotes and coins (exclusive right of cash issuance)

Collecting and publishing statistical information

Setting and publishing official exchange rates

Promoting the stability of the financial system.

MNB-II

Control and formulate monetary policy

Handle government borrowing

Act as the other banks’ bank (lender of last resort)

Set and control interest and exchange rates

Do business with international institutions (e.g. IMF)

Conduct money transfer to other countries

Financial Markets/Institutions

Bringing together of buyers and sellers of financial securities to establish prices

Provides a mechanism for those with excess funds (savers) to lend to those who need funds (borrowers)

Includes banks, savings and loans, credit unions, investment banks and brokers, mutual funds, stock and bond markets

Banking

Place where savers can invest their funds to earn interest with a minimum of risk.

Make loans to individuals and small businesses

Дата добавления: 2015-11-14