With the aid of examples outline two reasons why the central bank monetary policy to combat...
With the aid of examples outline two reasons why the central bank monetary policy to combat inflation may only achieve limited success
Homework Answers
Monetary policy is implemented by central bank and it has two tools:
Interest rates and money supply.
During an inflationary level, govt. can adopt contractionary monetary policy ( raising interest rates and lowering money supply ).
During an deflationary level, govt. can adopt expansionary monetary policy ( lowering interest rates and increasing money supply ).
The central bank monetary policy to combat inflation may only achieve limited success because of following reasons.
a. Inflation targeting is based heavily on forecasts of future inflation and economic activity, and these forecasts are often highly unreliable. Current example is Venezuela.
b. Monetary policy will need to adjust if supply side shocks are faced by economy. Eg. Increasing oil prices. India in late 2018.
c. Finding an appropriate inflation target in an economy is always difficult.
d. Time lags and Possible ineffectiveness in recession are also additional problems. Eg. USA from 2008 onwards.
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With the aid of examples outline two reasons why the central
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