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Chapter 16: Q.2 Critical Thinking Questions (page 365)

What do you think might be lost-and by whom - if the Fed were to follow an easily understood rule as a guide for conducting monetary policy? Explain.

Short Answer

Expert verified

It would be everyone's loss.

Step by step solution

01

introduction

At the point when a policy is to such an extent that individuals expect it by utilizing all suitable data, then, at that point, the arrangement becomes ineffectual assuming the policy becomes ineffectual or on the other hand on the off chance that the public authority's endeavour to decrease joblessness brings about additional expansion and an expansion in the business.

02

explanation

In the event that the Fed were to adhere to an effortlessly perceived guideline, it will be simple for individuals to expect the Fed's approach activity. Both judicious assumptions speculation and strategy immateriality recommendation let us know if an approach becomes expected then it consequently becomes incapable even in the short-run.

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Most popular questions from this chapter

Explain how the Federal Reserve has implemented a credit policy since 2008.

Evaluate how expansionary and contractionary monetary policy actions affect equilibrium real GDP and the price level in the short run.

Consider the two panels of Figure 16-2. Suppose that instructions in the latest FOMC Directive call for a monetary policy action aimed at pushing down the rate of interest prevailing in the economy. Use the appropriate panel of the figure to assist in explaining whether officials at the Federal Reserve Bank of New York's Trading Desk should buy or sell existing bonds.

Consider the data in Problem 16-10. Suppose that the money supply increases by $ 100 billion and real GDP and the income velocity remain unchanged.

a. According to the quantity theory of money and prices, what is the new equilibrium price level after full adjustment to the increase in the money supply?

b. What is the percentage increase in the money supply?

c. What is the percentage change in the price level?

d. How do the percentage changes in the money supply and price level compare?

Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all of its policy instruments except interest on reserves, what should the Fed do with its policy tools?
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