Explain the time inconsistency problem and how it relates to the debate over rules versus discretionary policy. Describe how the time inconsistency problem is important for central bank behavior in terms of disinflationary policies.

Explain the time inconsistency problem and how it relates to the debate over rules versus discretionary policy. Describe how the time inconsistency problem is important for central bank behavior in terms of disinflationary policies.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: You will answer the following questions listed below. You will submit a Word document that will…

A: With regards to economics, "fed" is most normally used to allude to the Federal Reserve System. The…

Q: True or false 1. Between July 2008 and March 2010, the monetary base increased by over 135%. This…

A: The money market is the market that is regulated by the central bank of a nation. It is a market…

Q: Match the reasons why the effects of expansionary monetary policy were limited during each U.S.…

A: In economics, a recession is a business cycle contraction characterized by a general decline in…

Q: ii) Monetary policy in a liquidity trap. Suppose the money demand is given by: M° = $Y (0.25 - i) as…

A: Crowding out means,when the interest rate becomes zero and then it cannot be lowered any furher.

Q: The common traditional consensus among economists is that the central bank cannot target both…

A: The central bank can control inflation and recession by monetary policy tools, but it can target one…

Q: 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Real GDP…

A: MPC = 0.75 Expenditure Multiplier = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4 If Investment spending is…

Q: Indicate whether the following statement is true, false, or uncertain and explain your answer using…

A: The following problem has been answered as follows:

Q: Describe the Fed’s monetary policy actions over the course of the 2020 year and identify whether…

A: Considering the impacts of COVID-19 on financial action and on dangers to the viewpoint, the FOMC…

Q: Consider the following scenario: a. In Argentina, the central bank needs to determine by how much…

A: Inflation refers to the increase un general price level. Inflation is worrisome for the economy as…

Q: When a central bank uses its powers over the banking system to engage in “against the business…

A: Monetary Policy refers to a policy that influences the economy by manipulating the banking system's…

Q: In today's interconnected world, many central banks communicate regularly and frequently with the…

A: Every commercial bank is required to keep a certain amount of reserve which is fixed by the central…

Q: The core ingredients of contractionary monetary policy are shown below. These events impact the real…

A: The contractionary money supply refers to when monetary policy raises the short-run interest rate in…

Q: How does Stephanie Kelton’s explanation of Modern Monetary Theory4 (MMT) affect your view of…

A: Government spending: Government expenditure is the amount of money spent by the government on…

Q: Question 3: Contrast the actions a central bank should take when an economy is in recession with…

A: A recession is a situation when the demand for goods and services goes down and the producers are…

Q: In what sense can greater central bank independencemake the time-inconsistency problem worse?

A: Time-inconsistency is the issue that occurs when a decision-maker, in particular a policy-maker,…

Q: According to many studies, in industrialised countries there is strong evidence of a negative…

A: The central bank of a country is responsible for the introduction of monetary policy measures that…

Q: Expansionary monetary policy

A: Fed uses expansionary monetary policy to increase money supply, using following tools. 1) Open…

Q: The Fed's monetary policy strategy that focuses on achieving price stability is known as: A. Money…

A: Monetary policy strategies focus on achieving macroeconomic stability through price stability,…

Q: Iag ngest and likely most troublesome Effectiveness Lag Implementation Lag Legislative Lag

A: A policy lag is the slack between the time a financial issue emerges, like recession or inflation,…

Q: A. Explain the principle known as monetary policy ineffectiveness and discuss Lucas’ argument as to…

A: Monetary policy refers to the actions taken by a central bank or monetary entities to oversee and…

Q: As a result of the recent global financial crisis, the Fed began implementing a new policy tool…

A: Federal Reserve purchases on federal agency debt and home loan security have reduced the cost of…

Q: The money supply of a country has been growing for many years causing expected inflation of 8% per…

A: According to the Friedman rule, the growth of the money supply should be equal to the estimated…

Q: Which elements of the Fed's balance sheet are traditional, as opposed to the crisis-related…

A: The banking system is incredibly important to the modern economy. Banks take money from customers…

Q: What interest rate essentially serves as the ceiling on how high the federal funds rate can go? What…

A: Banks are required to keep a required amount of reserves with them, known as required reserves. "The…

Q: Which of the below statements DOES NOT CORRECTLY describe the immense power or policy choice of the…

A: In the US, the federal reserve is considered as the central bank and works as the bank for the…

Q: Federal Reserve independence is thought to Question 11 options: a) help Congress to better…

A: With more independence for federal reserve, the central bank will be more open, transparent and…

Q: When the Federal Reserve lowers the discount rate, this indicates they are pursuing --------- a)…

A: Any policy employed by Federal reserve would be classified as monetary policy which could be either…

Q: In an economy where the central bank has implemented a digital currency alongside traditional…

A: The issue is to comprehend the financial ramifications of a national bank carrying out a…

Q: Explain the difference between the Keynesian and the monetarist views on how an increase in the…

A: Keynesian economics emphasizes fiscal policy to control the business cycles in the economy. Keynes…

Q: Which one of these policies should the Fed engage in if unemployment is very high and inflation is…

A: Answer - Need to find- Which one of these policies should the Fed engage in if unemployment is very…

Q: Why does having a dual mandate complicate policy making at a central bank like the FED? Why do some…

A: Modern Monetary Policy: Modern monetary policy refers to the contemporary approaches, tools, and…

Q: The Chairman or Chairlady or Fed Chair (a politically correct term) of the Federal Reserve Bank has…

A: Federal Open Market Committee:A policy-making body within the Federal Reserve System responsible for…

Q: Provide a critical analysis and discussion on how the COVID-19 has affected the strategy of banks.…

A: How does the Covid influence banks? To begin with, firms that have quit working miss on incomes,…

Q: You're on the Federal Open Market Committee! a) The economic data indicate that inflationary…

A: (a) In case there is any inflationary gap, the target federal funds rate which is the target…

Q: How does inflation targeting help reduce the timeinconsistency problem of discretionary policy?

A: Inflation targeting refers to the setting up of the inflation rate target in the economy. The…

Q: onomy was in equilibrium; the rate of inflation was on target. An increase in the level of…

A: Explanation of graph:- In below diagram REAL G D P is palced on OX axis while AGGREGATE PRICE LEVEL…

Q: Analyse why modern central banks have tended to keep the interest rate at a given level rather than…

A: The management of money supply and interest rates is a crucial responsibility of modern central…

Q: Use Dornbusch’s overshooting model to discuss fully what will happen (in the short- and long-runs)…

Q: Reflections on a classic: A Monetary History of the United States, 1867 to 1960, by Milton Friedman…

A: This can be described as the central authority of the banking system of that particular nation. The…

Q: if the reserve requirement were so low that no bank felt it was a constaint, then the…

A: Reserve requirement refers to the proportion of the total deposits that the commercial banks have to…

Q: different

A: The Correct answer is option 'B' - generate, stimulate, or hurt the economy.

Question

Explain the time inconsistency problem and
how it relates to the debate over rules versus
discretionary policy. Describe how the time
inconsistency problem is important for central
bank behavior in terms of disinflationary
policies.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

Step 2

Step 3

Step 4

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Draw and properly label three graphs of money supply-money demand (in one graph), investment demand, and AD-AS (6%). Then, referring to the graphs in your explanation, use one of the three traditional monetary tools to explain how the monetary transmission mechanism works to close recessionary and also inflationary gaps. (9%)
What is Domestic Systemically Important Bank (D-SIB) and Global Systemically Important Bank (G-SIB) ? How the mechanism of both ? Explained with comprehensive
Provide brief intuitive answers to the following questions. 1. What are the main empirical and theoretical contributions of the Mankiw, Romer and Weil's paper? Define one of the main empirical challenges they faced in their analysis? 2. Explain what central banks can do when they encounter a liquidity trap, and cannot use conventional monetary policy. 3. Explain how the real business cycle model can explain why the price level is countercyclical at some times, and uncorrelated with output at other times.
What regulations appear to allow a central bank's attempts to restrict the quantity of lending by banks by applying specific controls to be evaded by banks seeking alternatives outside of the regulatory preview?
________ Is a situation when the managed floating is exercised by the central bank
outline two reasons for a central bank choosing to purse a contractionary monetary policy, and indicate whether you consider that these apply widely at the present time.
Discuss how Monetarists modified the original Philips curve to derive the long-run level of output at the Natural Rate of Unemployment. Also explain the “policy ineffectiveness paradigm” arising from the super-neutrality of money argument and its implications for monetary policy
Why is a public announcement of numerical inflationrate objectives important to the success of an inflationtargeting central bank?
When faced with mild stagflation due to a leftward shift in the short-run AS curve, central bankers usually: Select one: a. sell government bonds on the open market b. do nothing and wait for the economy to self-correct (unless inflation is high or accelerating) c. offset the inflationary effect by expansionary monetary policy shifting AD to the right d. raise the interest rate target to offset the economic contraction
Which statement best describes the Federal Reserve's current level of transparency to the American public? The actions of the Fed are largely carried out in secrecy with little regard to public transparency. The Fed is somewhat transparent with regard to some aspects of monetary policy, but does not disclose details regarding macroeconomic conditions and goals. The Fed is extremely transparent with regard to monetary policy and discloses goals, targets, and predictions for the macroeconomy. The Fed only reports to the American public during periods of economic slow down.
Which of the following is true of a central bank that employs inflation targeting? A target rate of employment is maintained by expanding or contracting the money supply. A target rate of annual inflation is maintained by hiring or firing federal employees. A target rate of annual inflation is maintained by increasing or decreasing tax revenues. A target rate of annual inflation is maintained by expanding or contracting the money supply.
When the Fed buys bonds (or bond options) on a larger scale (than before) from private banks, ceteris paribus Group of answer choices A) the money supply tends not to change. B) it tends to cause deflation. C) the money supply tends to decrease. D) aggregate demand tends to shift left. E) the money supply tends to increase.