Contraction monetary policy work in principle

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Reference no: EM138673

Q. Investment and Monetary Policy

(a) The Economist on the 7th May 2011 printed the following:

As Vietnam's government appears newly determined to douse the inflationary fires. On 4th May the country's central bank also the State Bank of Vietnam which raised one of its key rates to 14%, the latest in a flurry of increases since February. Its campaign was accompanied by a package of promises to tighten money and credit.

The article touches upon 2 crucial instruments of monetary strategy. What are they? How do the instruments of contraction monetary policy work in principle? Clarify your answer with the help of diagrams (AD-AS or Keynesian Cross and MD-MS).

(b) Describe the costs of disinflation? Also explain your answer based on a diagram (AD-AS).

Reference no: EM138673

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