A nominal anchor promotes price stability byA) outlawing inflation.B) stabilizing interest rates.C) keeping inflation expectations low.D) keeping economic growth low.
Question
A nominal anchor promotes price stability byA) outlawing inflation.B) stabilizing interest rates.C) keeping inflation expectations low.D) keeping economic growth low.
Solution
A nominal anchor promotes price stability by C) keeping inflation expectations low.
Here's a step-by-step explanation:
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A nominal anchor is a macroeconomic policy tool used to provide stability in a country's monetary system. It's a standard that allows changes in the supply of money to be measured.
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This tool can be a specific target for inflation, money supply, exchange rate, or interest rate. The central bank sets this target and then adjusts its monetary policy to achieve it.
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By setting a target (the nominal anchor), the central bank provides a clear expectation for the future. This helps to stabilize the economy because businesses, investors, and consumers can plan their financial decisions based on this expectation.
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If the nominal anchor is an inflation target, for example, and the central bank is successful in achieving this target, then inflation expectations will be low. This is because people trust that the central bank will keep inflation close to its target.
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When inflation expectations are low, price stability is promoted. This is because businesses are less likely to increase their prices if they expect inflation to be low, and consumers are less likely to demand wage increases.
So, a nominal anchor promotes price stability by keeping inflation expectations low.
Similar Questions
What are the benefits of using a nominal anchor for the conduct of monetary policy?
If a central bank adopts one or a combination of nominal anchors, it loses ____ in the long run.[Hint: see page 13-19 of lecture 3C] Group of answer choicesthe control over real GDP growth ratethe control over inflationthe control over exchange ratesmonetary autonomy
1. The most common definition that monetary policymakers use for price stability is A) low and stable deflation. B) an inflation rate of zero percent. C) high and stable inflation. D) low and stable inflation. 2. Inflation results in A) ease of planning for the future. B) ease of comparing prices overtime. C) lower nominal interest rates. D) difficulty interpreting relative price movements. 3. Economists believe that countries recently suffering hyperinflation have experienced A) reduced growth. B) increased growth. C) reduced prices. D) lower interest rates. 4. Monetary policy is considered time-inconsistent because A) of the lag times associated with the implementation of monetary policy and its effect on the economy. B) policymakers are tempted to pursue discretionary policy that is more contractionary in the short run. C) policymakers are tempted to pursue discretionary policy that is more expansionary in the short run. D) of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy. 5. The time-inconsistency problem in monetary policy can occur when the central bank conducts policy A) using a nominal anchor. B) using a strict and inflexible rule. C) on a discretionary, day-by-day basis. D) using a flexible, discretionary rule. 6. A nominal anchor promotes price stability by A) outlawing inflation. B) stabilizing interest rates. C) keeping inflation expectations low. D) keeping economic growth low. 7. Having interest rate stability A) allows for less uncertainty about future planning. B) leads to demands to curtail the Fed's power. C) guarantees full employment. D) leads to problems in financial markets.
Inflation targeting has the following advantages EXCEPT FOR ________. A. increased monetary policy transparency B. reduction of the time-inconsistency problem C. immediate signal on the achievement of the target D. consistency with democratic principles
Inflation results inA) ease of planning for the future.B) ease of comparing prices over time.C) lower nominal interest rates.D) difficulty interpreting relative price movements.
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