Question

Which of the following is a problem faced by the Fed in implementing short-run monetary policy?

a.The Fed cannot affect inflation in the long run
b.Sometimes no one will sell bonds to the Fed
c.The Fed does not have the ability to change the monetary base
d.There is a lagged effect of policy on nominal GDP

Answer 1

The main problem faced by the Fed when implementing short-run monetary policy is the lagged effect it has on nominal GDP, due to long and variable lags before changes in policy can impact the economy.

Step-by-step explanation:

The problem faced by the Fed in implementing short-run monetary policy that is highlighted here is d. There is a lagged effect of policy on nominal GDP. Monetary policy implemented by the Federal Reserve, or any central bank, has to go through a series of stages before it can influence the economy. Initially, the central bank must recognize an economic situation, decide to adjust monetary policy, and then enact the changes through the banking system. This process involves altering interest rates, which subsequently influences business investments and consumer spending habits. However, due to long and variable lags, these changes take time to take effect and impact the overall economy, making the precision of monetary policy a challenging endeavor.