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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

Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.

What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?

In the tables that follow, you will find consolidated balance sheets for the commercial banking system and the 12 Federal Reserve Banks. Use columns 1 through 3 to indicate how the balance sheets will read after each transaction a to c is completed. Do not cumulate your answers; that is, analyze each transaction separately, starting in each case from the numbers provided. All accounts are in billions of dollars.


\(

Consolidated Balance Sheet:

All commercial banks

1

2

3

Assets


Reserve

Securities

Loans




33

60

60





150

3














Liabilities and net worth:



Checkable deposits

Loans from federal reserve banks


\)

Consolidated Balance Sheet:

The 12 Federal Reserve Banks

1

2

3

Assets


Securities

Loans to commercial banks




60

03





33













Liabilities and net worth:



Reserves of commercial bank


Treasury deposits

Federal reserve notes

3

27






a. A decline in the discount rate prompts commercial banks to borrow an additional \(1 billion from the Federal Reserve Banks. Show the new balance-sheet numbers in column 1 of each table.

b. The Federal Reserve Banks sell \)3 billion in securities to members of the public, who pay for the bonds with checks. Show the new balance-sheet numbers in column 2 of each table.

c. The Federal Reserve Banks buy $2 billion of securities from commercial banks. Show the new balance-sheet numbers in column 3 of each table.

d. Now review each of the previous three transactions, asking yourself these three questions: (1) What change, if any, took place in the money supply as a direct and immediate result of each transaction? (2) What increase or decrease in the commercial banks' reserves took place in each transaction? (3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of the commercial banking system occurred as a result of each transaction?

In 1980, the U.S. inflation rate was 13.5 percent, and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of unemployment was 6 percent at that time. What value does the Taylor Rule predict for the Fed’s target interest rate? Would you be surprised to learn that the Fed’s targeted interest rate (the federal funds rate) reached 18.9 percent in December 1980?

What are the components affected in a contractionary monetary policy?
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