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Chapter 17: Q.1 (page 468)

What are the benefits of using a nominal anchor for the conduct of monetary policy?

Short Answer

Expert verified

Nominal anchor helps in keeping inflation expectations low and stable

Step by step solution

01

Concept Introduction  

Monetary policies are macroeconomic policies developed and implemented by the country's central bank. It demonstrates how the Central Bank manages to keep the economy's liquidity stable. The primary goal of any monetary policy is to control inflation and employment.

02

Explanation

A nominal variable such as the inflation rate that limits the price level in order to maintain price stability is referred to as a nominal anchor. It is a straightforward mechanism for determining the overall price level in the economy.

The nominal anchor helps to keep the nominal variable within a narrow range. This helps in keeping inflation expectations low and stable. A nominal anchor based on quantity only targets the money, whereas a nominal anchor based on price targets an exchange rate or an interest rate.

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Most popular questions from this chapter

. 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?

“Interest rates can be measured more accurately and quickly than reserve aggregates; hence an interest rate is preferred to the reserve aggregates as a policy instrument.” Do you agree or disagree? Explain your answer

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.

If the Fed has an interest-rate target, why will an increase in the demand for reserves lead to a rise in the money supply? Use a graph of the market for reserves to explain.

“A central bank with a dual mandate will achieve lower unemployment in the long run than a central bank with a hierarchical mandate in which price stability takes precedence.” Is this statement true, false, or uncertain? Explain
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