Question

Economists have no final consensus on whether a central bank should be required to focus only on inflation or should have greater discretion. For those who subscribe to the inflation targeting philosophy, the fear is that politicians who are worried about slow economic growth and unemployment will constantly pressure the central bank to conduct a loose monetary policy—even if the economy is already producing at potential GDP. In some countries, the central bank may lack the political power to resist such pressures, with the result of higher inflation, but no long-term reduction in unemployment. The U.S. Federal Reserve has a tradition of independence, but central banks in other countries may be under greater political pressure. For all of these reasons—long and variable lags, excess reserves, unstable velocity, and controversy over economic goals—monetary policy in the real world is often difficult. The basic message remains, however, that central banks can affect aggregate demand through the conduct of monetary policy and in that way influence macroeconomic outcomes.

(True/False)

Answer 1

Economists have differing views on whether a central bank should focus solely on inflation or have more discretion. Central banks can influence macroeconomic outcomes by affecting aggregate demand through monetary policy.

Step-by-step explanation:

Economists have differing views on whether a central bank should focus solely on inflation or have more discretion. Inflation targeting philosophy proponents fear that politicians may pressure the central bank to adopt loose monetary policies even when the economy is already producing at potential GDP. Some central banks lack political power to resist such pressures, resulting in higher inflation without long-term reduction in unemployment. Despite challenges such as long lags, excess reserves, unstable velocity, and controversy over economic goals, central banks can influence macroeconomic outcomes by affecting aggregate demand through monetary policy.