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
C) keeping inflation expectations low.
A nominal anchor is a macroeconomic policy that governments and central banks implement to provide stability in the nation's pricing structure and economic system. It's a target value or range that policy makers set to steer the economy. This could be an inflation target, an exchange rate or a money supply.
The main purpose of a nominal anchor is to anchor expectations about the future path of inflation. If people expect low inflation, they will act in ways that make low inflation a self-fulfilling prophecy. For example, they will not demand large wage increases or rapidly increase prices, which could otherwise create a spiral of rising prices. Therefore, by keeping inflation expectations low, a nominal anchor promotes price stability.
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
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.
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
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