Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important?
What will be an ideal response?
Instrument independence is the ability of the central bank to set its instruments, and goal independence is the ability of a central bank to set its goals. The Fed enjoys both types of independence. The Fed is largely independent of political pressure due to its earnings and the conditions of appointment of the Board of Governors and its chairman. However, some political pressure can be applied through the threat or enactment of legislation affecting the Fed. Independence is important because there is some evidence that independent central banks pursue lower rates of inflation without harming overall economic performance.
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If the income elasticity of demand is 0.5, the good is
a. a luxury. b. a normal good (but not a luxury). c. an inferior good. d. a Giffen good.
Which of the following is not a common response to the moral hazard problem that employers face?
a. offering all employees some funding for additional education b. paying efficiency wages c. requiring employees to provide itemized receipts for reimbursable expenses d. paying year-end bonuses rather than higher monthly earnings
The former communist countries of eastern Europe and the Soviet Union
A. have a better track record in environment protection than market economies. B. have a dismal environmental record. C. epitomize the ability of planned economies to protect the environment. D. have no water pollution problems.
Hedging is possible only when investments have:
A. the same risk premiums. B. payoffs that are independent of each other. C. opposite payoff patterns. D. the same payoff patterns.