Question

32. The credibility of the central bank: a. promotes long-run growth. b. is irrelevant for controlling inflation. c. is crucial for controlling inflation and stabilizing output d. promotes sensible fiscal policy. e. implies low interest rates. 33. You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, you suggest a: a. 6 percent interest rate b. 6 percent money supply growth. c. 2 percent money supply growth d. 0 percent money supply growth. e. 2 percent interest rate.

Answer 1

(32) (c)

Interest rate signals sent out by central bank has to be credible to have proper inflation control and output stabilization.

(33) (a)

As per quantity theory,

M x V = P x Y

% Change in M + % Change in V = % Change in P + % Change in Y

% Change in M + 0 = 2% + 4%

% Change in M = 6%