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Chapter 17: Q. 2 (page 468)

What incentives arise for a central bank to fall into the time-inconsistency trap of pursuing overly expansionary monetary policy?

Short Answer

Expert verified

Central bankers preferably accept that when they seek after an excessively expansionary policy it will prompt an expansion in work or lift the result.

Step by step solution

01

Concept Introduction

The Governing Council has characterized a strategy which includes an evaluated meaning of cost steadiness.

02

Explanation

Central bankers preferably accept that when they seek after an excessively expansionary policy it will prompt an expansion in employment or lift the result. Be that as it may, over the long haul, this outcome is just in expanding expansion with no genuine additions as far as result or employment. Additionally, the government officials can impact the central bank to seek after an excessively expansionary policy.

03

Final answer

The politicians can impact the central bank to seek after an excessively expansionary policy.

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Most popular questions from this chapter

What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?

a. Unemployment rises due to a recession.

b. An oil price shock causes the inflation rate to rise by 1%and output to fall by 1%.

c. The economy experiences prolonged increases in productivity growth while actual output growth is unchanged.

d. Potential output declines while actual output remains unchanged.

e. The Fed revises its (implicit) inflation target downward.

f. The equilibrium real fed funds rate decreases

According to the Greenspan doctrine, under what conditions might a central bank respond to a perceived stock market bubble?

What procedures can the Fed use to control the federal funds rate? Why does control of this interest rate imply that the Fed will lose control of nonborrowed reserves?

It is possible to access other central bank websites to learn about these banks’ structures. One example is the European Central Bank. Go to http://www.ecb.int/ index.html. On the ECB home page, find information about the ECB’s strategy for monetary policy.

. The Federal Open Market Committee (FOMC) meets about every six weeks to assess the state of the economy and to decide what actions the central bank should take. The minutes of this meeting are released three weeks after the meeting; however, a brief press release is made available immediately after the meeting. Find the schedule of minutes and press releases under the “Meeting calendars and information” tab at http://www.federalreserve.gov/fomc/.

a. When was the last scheduled meeting of the FOMC? When is the next meeting?

b. Review the press release from the last meeting. What did the committee decide to do about short-term interest rates?

c. Review the most recently published meeting minutes. What areas of the economy seemed to be of most concern to the committee members?
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