Question

Which one of the following is an advantage of having an independent central bank? Central banks may be swayed by short term considerations and avoid inflationary policies. Central bank's actions can be frequently monitored by the legislative branch. The central bank independence does not appear to come at the cost of higher output or higher employment. The countries whose central banks are more independent have lower rates of inflation. All of the following are institutional features that make a central bank independent, except when: they are swayed by short run political considerations. they are not obligated to buy newly issued government bonds. their actions are not subject to frequent interference or review. the central bankers are appointed for a longer period of time.

Answer 1

Answer: 1. The countries whose central banks are more independent have lower rates of inflation.

2. They are swayed by short run political considerations

Step-by-step explanation:

1. Central Banks that are less independent run the risk of the government putting too much pressure on them to embark on policies that would increase inflation such as making them print excessive amounts of currency. This has been corroborated by studies that show that indeed, countries with more independent central Banks have less inflation than countries with less independent Central Banks.

In the graph attached, notice how much lower inflation is in German and the USA due to a higher degree of Central Bank independence.

2. A Central bank that is Independent does not concern itself with Politics but rather with exercising it's mandate. Many a time leading politicians in Countries with less Independent Central Banks will pressure the central bank to roll out certain policies that enable their approval to rise and increase their chances of re-election regardless of how harmful these policies will be in the long run.