Public Finance Management
Briefly explain the process by which a Central Bank can seek to manage short-term interest rates. (20 marks) (b) Explain the concept of Quantitative Easing and consider why such a practice may be needed in the context of monetary policy since 2008. (30 marks) (c) Examine the view that the cost of capital channel is the dominant component of the monetary transmission mechanism. (50 marks) Explain and illustrate your answer in no more than 2,500 words. This limit includes tables and captions but excludes footnotes, endnotes, tables of figures and references. Answers that exceed this limit will result in a loss of marks. Full Full details of penalties for late submission, exceeding the word limit and other information can be found at the end of this assignment. Your assignment should be submitted via the Virtual Learning Student Assignment Guidelines There is no single right way to answer this question, rather there are several approaches, and different students will have their own view of what is expected and how much weight to give any particular element. Whatever your approach, you will need to plan your answer carefully, to provide a focused and succinct answer to the question, within the word-limit. In your essay you should demonstrate your knowledge of and ability to explain and apply economic models. You must justify any conclusion you reach on the basis of evidence provided by you by reference to, or quotation from, the course notes, textbook, other course readings, or any other source you choose to use. As long as your essay gives a good justification for the answer and demonstrates your reasoning ability and your knowledge you can obtain a good grade. This assignment focusses on Unit 4 Monetary Policy and the Central Bank. You will also need to read Miles, Scott and Breedon (2012) Macroeconomics: Understanding the Global Economy ch 13. The assignment is based on material in Unit 4 which comes towards the end of the first half of the course, so you will need to plan your work carefully in order to be able to submit your assignment by the deadline. In Part (a) you should consider the actions of the Central Bank in carrying out open market operations. In Part (b) you will need to look at the idea quantitative easing in an era of very low interest rates. In Part (c) you should consider the different elements of the monetary transmissions mechanism and the article by Bernanke and Mishkin (1997). You may also wish to supplement your discussion with material of your own. Your essay should be written in an academic style, presenting your view carefully, justifying your view with rigour and discussion. When you present a relevant theory in your justification, it is good practice, wherever possible, to demonstrate your understanding by using a simple equation or diagram. In presenting your argument you should comment on possible weaknesses and limitations.
Sample Solution
Public Finance Management
If a nation`s economy were a human body, then its heart would be the Central Bank. And just as the heart works to pump life-giving blood throughout the body, the central bank pumps money into the economy to keep it healthy and growing. Sometimes economies need less money, and sometimes they need more. Central banks affect the quantity of money in circulation by buying or selling government securities through the process known as open market operation (OMO). When a central bank is looking to increase the quantity of money in circulation, it purchases government securities from commercial banks and institutions. This frees up bank assets: they now have more cash to loan. Central banks do this sort of spending a part of an expansionary or easing monetary policy, which brings down the interest rate in the economy.
