Question

If a currency reform has no effects on the​ economy's real​ variables, why do governments typically institute currency reforms in connection with broader programs aimed at halting runaway​ inflation? ​ (There are many instances in addition to the Turkish case mentioned in the text. Other examples include​ Israel's switch from the pound to the​ shekel, Argentina's switches from the peso to the austral and back to the​ peso, and​ Brazil's switches from the cruzeiro to the​ cruzado, from the cruzado to the​ cruzeiro, from the cruzeiro to the cruzeiro​ real, and from the cruzeiro real to the​ real, the current​ currency, which was introduced in​ 1994.)

Answer 1

The correct anwer is There may be a psychological benefit in that currency reform can have a positive effect on inflation expectations. ​ However, for the stabilization plan to​ succeed, it must be backed up by concrete policies to reduce monetary growth.

Step-by-step explanation:

Monetary policy or financial policy is a branch of economic policy that uses the amount of money as a variable to control and maintain economic stability. It includes the decisions of the monetary authorities regarding the money market, which modify the amount of money or the interest rate. When it is applied to increase the amount of money, it is called an expansive monetary policy - quantitative expansion - and when it is applied to reduce it, a restrictive monetary policy.

Four basic objectives of monetary policy can be stated in different ways:

1. money value stability (price containment, inflation prevention);
2. higher rate of economic growth;
3. full occupation or full employment (highest possible level of employment);
4. avoid permanent imbalances in the balance of payments and maintenance of a stable exchange rate and protection of the position of international reserves.