Question

Monetary policy is inevitably imprecise, for a number of reasons: (a) the effects occur only after long and variable lags; (b) if banks decide to hold excess reserves, monetary policy cannot force them to lend; and (c) velocity may shift in unpredictable ways. The basic quantity equation of money is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real output of the economy. Some central banks, like the European Central Bank, practice inflation targeting, which means that the only goal of the central bank is to keep inflation within a low target range. Other central banks, such as the U.S. Federal Reserve, are free to focus on either reducing inflation or stimulating an economy that is in recession, whichever goal seems most important at the time. (True/False)

Answer 1

Monetary policy is a subject in economics that deals with the control of the money supply and interest rates by a central bank to stabilize the economy. It is inevitably imprecise due to factors such as long and variable lags, banks' decisions to hold excess reserves, and unpredictable shifts in velocity. Central banks can have different goals in their monetary policy, with some focusing on inflation targeting and others having more discretion to address the prevailing economic conditions.

Step-by-step explanation:

Monetary policy is a subject in economics that deals with the control of the money supply and interest rates by a central bank to stabilize the economy. The basic quantity equation of money, MV = PQ, shows the relationship between the money supply, velocity of money, price level, and real output of the economy. However, monetary policy is inevitably imprecise due to factors such as long and variable lags in its effects, banks' decisions to hold excess reserves, and unpredictable shifts in velocity.

Central banks can adopt different approaches to monetary policy. For example, the European Central Bank practices inflation targeting, which means their main goal is to keep inflation within a low target range. On the other hand, the U.S. Federal Reserve has more discretion and can focus on reducing inflation or stimulating the economy, depending on the prevailing economic conditions.

Overall, monetary policy is a complex area that involves managing various economic factors and responding to changing circumstances, making it challenging to achieve precise outcomes.