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Chapter 17: Q. 3 (page 468)

Why would it be problematic for a central bank to have a primary goal of maximizing economic growth?

Short Answer

Expert verified

Indeed, because this might bring about underlying changes in the economy that could prompt an expansion in inflation.

Step by step solution

01

Concept Introduction

It prompts inflation and lopsided conveyance of abundance, due to non-amazing contest, and many, many stunts.

02

Explanation

Inconsistent dispersion mutilates the economy, because many can not buy any more, what they need, while others will want to by extravagance items. Economy no more fulfill the necessities of all general public, however of a couple in particular. Since there are less purchasers, there is likewise a downturn, then, at that point, a monetary emergency and, if without political response, additionally friendly distress. We notice these financial cycles. They are quicker if the economy doesn't conform to moral principles.

03

Final answer

Yes, because this could prompt lopsided characteristics in the economy that could prompt air pockets and financial crises.

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Most popular questions from this chapter

Why might inflation targeting increase support for the independence of the central bank in conducting monetary policy?

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

The Fed’s maximum employment mandate is generally interpreted as an attempt to achieve an unemployment rate that is as close as possible to the natural rate and inflation that is close to its 2%goal for personal consumption expenditure price inflation. Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), the unemployment rate (UNRATE), and a measure of the natural rate of unemployment (NROU). For the price index, adjust the units setting to “Percent Change From Year Ago” to convert the data to the inflation rate; for the unemployment rate, change the frequency setting to “Quarterly.” Download the data into a spreadsheet. Calculate the unemployment gap and inflation gap for each quarter. Then, using the inflation gap, create an average inflation gap measure by taking the average of the current inflation gap and the gaps for the previous three quarters. Now apply the following (admittedly arbitrary and ad hoc) test to the data from 2000:Q1 through the most recent data available: If the unemployment gap is larger than 1.0for two or more consecutive quarters, and/ or the average inflation gap is larger in absolute value than 0.5for two or more consecutive quarters, consider the mandate “violated.”

a. Based on this ad hoc test, in which quarters has the Fed “violated” the price stability portion of its mandate? In which quarters has the Fed “violated” the maximum employment mandate?

b. Is the Fed currently “in violation” of its mandate?

c. Interpret your results. What does your response to part (a) and the data imply about the challenge that monetary policymakers face in achieving the Fed’s mandate perfectly at all times?

Why is a public announcement of numerical inflation rate objectives important to the success of an inflation-targeting central bank?

What are the key advantages and disadvantages of the monetary strategy used by the Federal Reserve under Alan Greenspan, in which the nominal anchor was implicit rather than explicit?
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