Question

Why then do central banks not do a better job of keeping economies near a stable equilibrium all the​ time?

One issue that arises is that in real life it is very hard to know the true level of _____

***1) the policy rate

***2) potential output

***3) actual output

.

Since this is hard to​ observe, we need to rely on inflation to get an idea of where the economy is. When doing​ this, we focus on the _____

**1)change in inflation

***2)level of inflation

as our guide.

The central bank can have a hard time adjusting the economy appropriately because​ ________.

A.the economy usually responds too quickly to policy decisions and there is a lot of​ "noise" in the​ economy, making it hard to know precise relationships between variables.

B.even though central banks can determine the state of the economy​ easily, they usually do not have the​ long-run health of the economy as their main goal.

C.there is a lag in how long it takes the economy to respond to policy decisions and there is a lot of​ "noise" in the​ economy, making it hard to know precise relationships between variables.

D. even though central banks can determine the state of the economy​ easily, and the economy responds to policy decisions​ quickly, the policy decisions made by central banks are consistently incorrect.

Answer 1

1. Why then do central banks not do a better job of keeping economies near a stable equilibrium all the​ time?

One issue that arises is that in real life it is very hard to know the true level of _____

***1) the policy rate

***2) potential output

***3) actual output

Potential output occurs when an economy produces what it can using all of its resources. In real life, it is very difficult to estimate an economy's optimal level of operating efficiency. There is little consensus among economists about the best way to measure potential gross domestic product.

2. Since this is hard to​ observe, we need to rely on inflation to get an idea of where the economy is. When doing​ this, we focus on the _____

**1)change in inflation

***2)level of inflation

as our guide.

3. The central bank can have a hard time adjusting the economy appropriately because​ ________.

C.there is a lag in how long it takes the economy to respond to policy decisions and there is a lot of​ "noise" in the​ economy, making it hard to know precise relationships between variables.

The effect of a policy action on the economy also depends on what people and firms think the Federal action means in the future and they act accordingly. There are several factors acting in the economy which takes time to respond to policy decisions.Economy is a complex system of chain of events making it difficult to respond too quickly to any policy decisions.