With reference to the information provided and your own knowledge, evaluate the possible microeconomic and macroeconomic effects on the Swedish economy of its central bank rate of minus 0.5 per cent.

Central banks around the developed world have been behaving in rather unexpected ways over the past few years. Take, for example, America’s Federal Reserve which has raised its bank rate on five separate occasions since the end of 2015 despite, the Federal Reserve’s preferred measure of inflation having fallen from 1.9 per cent to 1.3 per cent over 2017, well below the 2 per cent target.Conversely, in Sweden, the inflation rate has risen from 0 per cent in March 2014 to 2.3 per cent in September 2017, and yet between 2014 and 2016, the Swedish Riksbank’s key bank rate fell from 0.75 per cent to minus 0.5 per cent, where it remains.The Bank of England’s Monetary Policy Committee, meanwhile, has stuck to the inflation targeting rule book much more closely, cutting bank rate to 0.25% in August 2016, when inflation was around 1 per cent, and raising it to 0.5% in November 2017 when inflation was above target at 3 per cent.Do the Federal Reserve’s and the Riksbank’s use of monetary policy imply that we are coming to the end of an era of inflation targeting? For example, are central bankers knowingly allowing inflation to stray well away from target because they are worried about broader economic and financial stability?This is not necessarily the case if we assume that policymakers are not setting bank rate based on current inflation but on the outlook for inflation perhaps 18 to 24 months in the future. Certainly, the Federal Reserve raised rates in 2015 and 2016 believing that inflation was heading back to target, but this is not the case unilaterally. For example, when the Bank of England cut bank rate in summer 2016, the Monetary Policy Committee’s minutes stated that: “The fall in sterling is likely to push up on CPI inflation in the short term ... probably causing it to rise above the target in the latter part of the MPC’s forecast period.”Perhaps a more worrying scenario is that central bankers no longer know what determines inflation. The expected relationship between unemployment and wage inflation as shown by the Phillips Curves has not held over recent years: unemployment has mostly fallen faster than forecast but wage growth has been lower than expected, perhaps reflecting the impact of technology and globalisation on wage rates. While the former would imply increasing inflationary pressures, the latter predicts the opposite: what are policymakers to do in light of such inconsistent messages?

Use the rule-of-thumb to predict how the Central Bank would want to change its funds rateand the real interest rate targets for each of the following scenarios if its estimate of theneutral real interest rate is 2%.a. A recession hits the economy leading output to be 0.75% below potential output andinflation to fall to 1%.b. An increase in consumer and business confidence pushes the economy to producingoutput at 2% above potential output while inflation rises to 3.5%c. Show the effect of b) in an AD-AS diagram

Assuming ceteris paribus, which one of the aggregate demand and aggregate supply diagrams below best represents the likely effects on the Russian economy of this cut in the Central Bank’s interest rate?

The actual output is lower than the potential output. (a) What open market operation would the central bank likely engage in? (b) Would the above open market likely increase or decrease nominal interest rates? (c) Would the open market operation identified above increase or decrease real GDP? Answer all in one word or as few words as possible

What are the two most important effects of a lower (nominal) interest rate on a country’sbalance of payments?