Should banks practice inflation-targeting? Give reasons to support your answer
Inflation-targeting refers to the practice in which the central bank is legally required to focus only on keeping inflation low.
Economists have not reached a consensus on whether a central bank should be required to focus only on inflation or should have greater discretion. For those who subscribe to the inflation-targeting philosophy, the fear is that politicians who are worried about slow economic growth and unemployment will constantly pressure the central bank to conduct a loose monetary policy—even if the economy is already producing at potential GDP. In some countries, the central bank may lack the political power to resist such pressures, with a result of higher inflation but no long-term reduction in unemployment. The U.S. Federal Reserve has a tradition of independence, but central banks in other countries may be under greater political pressure. Or in another scenario, central bankers may be tempted to tinker continually with the interest rate, pushing it up and down from month to month in a way that creates uncertainty and risk in the economy. Besides, inflation-targeting also has its risks. A central bank that focuses only on inflation will not use expansionary monetary policy to fight a recession. In the early 2000s, for example, unemployment rates rose in many European countries, but the European Central Bank focused only on keeping inflation rates low and not on whether it might have been wise to run a more expansionary monetary policy.
For all of these reasons—long and variable lags, excess reserves, and controversy over economic goals—monetary policy in the real world is often difficult. But the basic message remains that central banks can affect aggregate demand through the conduct of monetary policy and in that way influence macroeconomic outcomes.
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a. True b. False Indicate whether the statement is true or false
Which of the following statements best describes production outcomes in the Soviet Union and pre-reform China?
A. Output was often high quality but insufficient in quantity because production managers were rewarded only for meeting quality standards. B. Output was generally high quality and sufficient in quantity because of the well-specified economic plans. C. Output was often low quality because production managers were rewarded only for meeting quantitative production targets. D. Output was of variable quality but sufficient in quantity because market signals were only consistent in telling managers how much to produce.
Bonds issued by the U.S. Treasury are referred to as benchmark bonds because:
A. they are highly liquid and virtually free of default risk. B. all bonds from national governments are labeled as benchmark bonds. C. all bonds from the U.S. government have the same rate of interest. D. they are always purchased for a premium.
Which of the following is NOT a characteristic of high-growth Asian economies?
A) stable macroeconomic policies B) similar governments C) credible commitments to expanding access to health care D) the development of skilled workforces