Question

When using indirect intervention, a central bank is likely to focus on:

A) Controlling interest rates
B) Eliminating currency
C) Ignoring economic indicators
D) Increasing inflation

Answer 1

Central banks typically use indirect intervention to control interest rates, impacting aggregate demand and assisting in achieving macroeconomic goals like low unemployment and low inflation.

Step-by-step explanation:

When using indirect intervention, a central bank is likely to focus on controlling interest rates. By affecting the cost of borrowing, central banks can influence aggregate demand and thus achieve their macroeconomic policy goals, which commonly include both low unemployment and low inflation. Central banks make decisions about the money supply primarily by setting interest rates, and this can impact the broader economy. The method of indirect intervention often involves influencing the conditions under which banks lend money to each other in the short term, which subsequently affects the overall level of interest rates in the economy.