Question

Suppose Congress decided to strip the Fed of its monetary policy independence and legislate interest rate changes. How would you expect the policy choices to change? Which arrangement would most likely provide price stability? The most likely result in the short run would be In the long run, the inflation rate would A. a decrease in money growth and rising interest rates; fall and nominal interest rates would rise further B. a decrease in money growth and rising interest rates; fall and nominal interest rates would fall C. an increase in money growth and falling interest rates; rise and nominal interest rates would rise D. an increase in money growth and falling interest rates; fall and nominal interest rates would fall further Price stability is most likely to remain the Fed's primary goal under an arrangement in which where Congress plays no role in making monetary policy decisions. A. True B. False

          Suppose Congress decided to strip the Fed of its monetary policy independence and legislate interest rate changes.
How would you expect the policy choices to change? Which arrangement would most likely provide price stability?
The most likely result in the short run would be
In the long run, the inflation rate would
A. a decrease in money growth and rising interest rates; fall and nominal interest rates would rise further
B. a decrease in money growth and rising interest rates; fall and nominal interest rates would fall
C. an increase in money growth and falling interest rates; rise and nominal interest rates would rise
D. an increase in money growth and falling interest rates; fall and nominal interest rates would fall further Price stability is most likely to remain the Fed's primary goal under an arrangement in which where Congress plays no role in making monetary policy decisions.
A. True
B. False

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Added by Lorena M.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Crystal Wang

05/23/2023

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This could result in short-term policy choices being influenced by political considerations rather than solely economic factors. Show more…

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Suppose Congress decided to strip the Fed of its monetary policy independence and legislate interest rate changes. How would you expect the policy choices to change? Which arrangement would most likely provide price stability? The most likely result in the short run would be In the long run, the inflation rate would A. a decrease in money growth and rising interest rates; fall and nominal interest rates would rise further B. a decrease in money growth and rising interest rates; fall and nominal interest rates would fall C. an increase in money growth and falling interest rates; rise and nominal interest rates would rise D. an increase in money growth and falling interest rates; fall and nominal interest rates would fall further Price stability is most likely to remain the Fed's primary goal under an arrangement in which where Congress plays no role in making monetary policy decisions. A. True B. False

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Transcript

00:01 What interest rates did the fed raise? so the interest rates would be the interest rate used by commercial banks for borrowing and lending.

01:00 State the fed's policy in terms of the money supply.

01:08 So the fed uses tools to control the money supply to stabilize the economy.

01:13 So the fed is going to increase the money supply through printing money and lowering interest rates, which encourages borrowing in order to spur economic growth.

01:53 So with more borrowing and lending, this leads to economic growth.

02:01 However, this can also lead to inflation.

02:04 So then they need to try to decrease the money supply to combat rising price levels.

02:30 So it does this through raising interest rates.

02:39 Now it's more expensive to borrow and lend money, so therefore that decreases the supply of money flowing through the economy.

02:55 Why might the fed raise interest rates before the cpi starts to rise? there is an inverse relationship between inflation, which leads to an increase in cpi and interest rates.

03:22 So with inflation, we have an increase in consumer price index.

03:46 Then because of the increased inflation, in order to decrease the money supply, the fed will raise interest rates.

04:02 So if they raise interest rates, they're trying to decrease the money supply.

04:07 To combat inflation, many economists believe the fed needs to be independent of politics.

04:18 Use the statement to explain why so many economists argue for fed independence.

04:24 The statement says the consumer price index has not increased, yet the fed is restricting growth in the economy, supposedly to fight inflation.

04:35 My constituents will want to know why they are going to have to pay more when they get a loan, and i don't have a good answer.

04:43 I think this is an outrage, and i think congress should have hearings on the fed's policy -making powers...

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