Question

Question 1

The advantage of an explicit inflation target is that it:

A. Group of answer choices

B. allows banks to set interest rates

C. raises the marginal product of capital

D. stabilizes money supply

E. helps anchor inflation expectations

F. completely eradicates discretionary monetary policy

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Question 2

The slope of the aggregate demand curve is determined

A. by the sensitivity of short-run output to both inflation and the real interest rate.

B. only by the sensitivity of the IS curve, or short-run output, to the real interest rate.

C. only by the sensitivity of short-run output to the inflation target.

D. by the sensitivity of short-run output to the real interest rate and by the central bank sensitivity to inflation.

E. only by the sensitivity of short-run output to the inflation rate.

Answer 1

Question 1):

Correct answer is HELPS ANCHOR INFLATION EXPECTATIONS. [ OPTION - E ]

Reason: Explicit inflation target helps anchor inflation expectations, This helps to find out the price of goods, wages and also investment. This is one of the benefits of the explicit inflation target. Therefore, except option E all other are wrong.

Question 2):

correct answer is BY THE SENSITIVITY OF SHORT-RUN OUTPUT TO THE REAL INTEREST RATE AND BY THE CENTRAL BANK SENSITIVITY TO INFLATION. [OPTION- D] .

EXPLNATION: The AD curve is downward sloping due to the reason that interest rate effect, the real-balance effect and also the foreign purchases effect. And also the central bank with the monetary policy has the capability to set the real rate of interest in the short run. The sensitivity of the output to the real rate of interest impact in short-run determines the slope of the aggregate demand curve.