Economics Discussion Chapter 18 &19: Discussion of pros and cons for central bank policies and Determine the impact of the US used inflation targeting

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Economics

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  • Discuss the pros and cons of central banks setting policy based on rules as opposed to setting policy based upon the discretion of policymakers at each policy meeting.
  • Determine the impact on the economy if the central bank in the U.S. used inflation targeting. Explain your rationale.

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Explanation & Answer

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In monetary Policy, discretion is important in offsetting output fluctuations whereas monetarists suggest a tight, fixed rule to ensure price stability. 

The effects of central bank using inflation targeting are as follows;

  • Restricted ability of the central bank to respond to financial crises or unforeseen events;
  • Potentially poor outcomes in employment, exchange rate and other macroeconomic variables beside inflation

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