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Chapter 25: Q.20 (page 676)

How can the establishment of an exchange-rate target bring credibility to a country with a poor record of inflation stabilization?

Short Answer

Expert verified

It enables policymakers to make decisions based on limited discretion rather than complete discretion.

Step by step solution

01

Content Introduction

The inflation can be stabilized by following:

Governments can fight inflation by imposing wage and price limits, but this can lead to a recession and job losses. Governments can also use a contractionary monetary policy to combat inflation by limiting the money supply in an economy by raising interest rates and lowering bond prices.

02

Content Explanation

By limiting discretionary policy, credible exchange dash rate targets can help to alleviate the problem of time dash inconsistency. By constraining discretionary policy, credible exchange-rate targets can help to alleviate the problem of time inconsistency.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI). Convert the units setting to "Percent Change from Year Ago, " and download the data. Beginning in January 2012, the Fed formally announced a 2% inflation goal over the "longer-term."

a. Calculate the average inflation rate over the last four and the last eight quarters of data available. How does it compare to the2% inflation goal?

b. What, if anything, does your answer to part (a) imply about Federal Reserve credibility?

Suppose two countries have identical aggregate demand curves and potential levels of output, and γis the same in both countries. Assume that in 2019 , both countries are hit with the same negative supply shock. Given the table of values below for inflation in each country, what can you say, if anything, about the credibility of each country's central bank? Explain your answer.

Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. How does the credibility of each country's central bank affect the speed of adjustment of the aggregate supply curve to policy announcements? How does this result affect output stability? Use an aggregate supply and demand diagram to demonstrate.

How would an unexpected change in the equilibrium real fed funds rate be an argument against using a Taylor rule for monetary policy implementation?

Robert Lucas won the Nobel Prize in economics. Go to http:/nobelprize.org/nobel_prizes/economics/ and locate the press release on Robert Lucas. What was his Nobel Prize awarded for? When was it awarded?
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