Question

25. When he was the U.S. Federal Reserve Ben Bernanke said that financial innova man, tion and the spread of U.S. curre the world had broken down the relationships between money, inflation, and output growth which made monetary aggregates less useful gauges for policy makers. Some other central banks use monetary aggregates as a guide to pol icy decisions, but Bernanke believed reliance monetary aggregates would be unwise. He said that there are differences between the United States and money demand. a. Explain how the debate surrounding the quan Europe in terms of the stability of tity theory of money could make "monetary gauges a less useful tool for policy makers." b. What do Ben Bernanke's statements reveal about his view on the accuracy of the quantity theory of money?

Answer 1

Solution 1

Ben Bernanke assumes that monetary gauges as tool are ineffective because of rising financial innovation like openings up of NBFC sector which leads to easy availability of cheap interest rate based loans, availability of virtual currency like Bitcoin, spread of US Currency as basket currency for all commodities trading which all cumulatively leads to widescale distribution of monetary supply And hence evaluation of effects of monetary policy cannot have implied effects.

Solution 2

Ben Bernanke tries to exhibit that quantitative easing cannot be used as an accurate tool to identify required effects like lifting economy out of recession and moving towards stability because an economy in an awkward situation will need combination of monetary policy tools as well as right fiscal policy guidelines to achieve implied effects. Hence relying or over dependency on monetary tools to fight recession or inflation is unwise.