Reply Tue 29 Jul, 2014 08:20 am
Hi!
I'm needing some help with basic economics. Can someone explain what is the expected central bank action in each of the following 4 scenarios?

I believe the central is supposed to take action and either increase or decrease interest rates based on the current state of the economy. I believe this is called monetary policy.

So what is supposed to happen in each of these 4 scenarios:
1) Recovery - when GDP is increasing but inflation is decreasing
2) Overheating - when GDP is increasing and inflation is increasing
3) Stagflation - when GDP is decreasing and inflation is increasing
4) Recession - when the GDP is decreasing and inflation is decreasing

Any comments are appreciated, even if you think the above definitions are inaccurate.

Thanks in advance!
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Type: Question • Score: 3 • Views: 1,173 • Replies: 2
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BonnieArteaga
 
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Reply Tue 9 Sep, 2014 12:02 am
@NewToEcons,
I think above all scenarios are absolutely right. Thanks for sharing.
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puzzledperson
 
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Reply Mon 5 Oct, 2015 11:08 pm
@NewToEcons,
The nature of central bank policy depends on the economic theories or even political views held by those who control its operations.

Monetarists are primarily concerned with controlling the size of the money supply, not interest rates. They are primarily concerned with avoiding inflation, and may view other economic problems as having their origins in fiscal (federal budgetary), currency exchange rate, trade policy, or other issues, including anything from savings rates to moral hazard. They tend to be non-interventionist unless influenced by political considerations.

Central bank economists who do target interest rates may have a range of approaches. It also matters if they consider the pursuit of full employment or the control of inflation to be the paramount goal.

For my own views on stagflation, and my analysis of central bank and government response, see the thread asking what is the difference between inflation and stagflation, and my recent replies.
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