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Chapter 16: Q10. (page 347)

True or False: In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.

Short Answer

Expert verified

The given statement is true.

Step by step solution

01

Step 1. Reason for the statement being true

The monetary policy has the advantages mentioned above: (1) isolation from political pressure and (2) speed and flexibility over the fiscal policy.

The monetary policy is speedy as there are fewer implementation lags than the fiscal policy. Moreover, it can be easily altered as the Fed controls it and doesn’t involve the government’s administrative hustle and bustle.

The reason why it is isolated from political pressure is that under the fiscal policy, the government, while making decisions, is always thinking about what is going to be its impact on the votes, but monetary policy is free to make decisions as it does not have the involvement of any political party.

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Most popular questions from this chapter

In 2009, the inflation rate reached a negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5 percent, what value does the Taylor Rule predict for the Fed’s target interest rate back then? Would that rate have been possible given the zero lower bound problem?

a. negative 4.6 percent, not possible.

b. positive 0.4 percent, possible.

c. negative 5.6 percent, not possible.

d. positive 6.4, possible.

Does the Taylor Rule put a higher weight on resolving the unemployment gap or the inflation gap? Explain.

Suppose that actual inflation is 3 percentage points, the Fed’s inflation target is 2 percentage points, and unemployment is 1 percent below the Fed’s unemployment target. According to the Taylor rule, what value will the Fed want to set for its targeted interest rate?

When bond prices go up, interest rates go _______.

a. up

b. down

c. nowhere

What are the two parts of the Fed’s dual mandate? How does the dual mandate relate to the bullseye chart? Which quadrants of the bullseye chart give conflicting signals to the Fed, and what is the source of the confusion in each case?
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