a
To find: The statement is true or false.
a
Explanation of Solution
False.
It is untrue that seignorage is responsible for the increase in inflation in OECD countries. However, seignorage is one of the argument which leads to an increase in the inflation rate in such countries. But at very low-interest rates, there is a little effect of seignorage.
There is another argument behind the increase in the inflation rate is when the central bank decreases its interest rate to almost 0 percent, which stimulates inflation.
b)
To find: Fighting inflation is the only Fed’s policy.
b)
Explanation of Solution
Uncertain.
Fed cannot ignore the other economic issues that an economy faces. So, targeting inflation cannot be the only target however, it can be one of the most important targets. As the economy faces various other economic issues and uncertainties, its
c)
To find: Inflation and money growth moved together from 1970 to 2009 or not.
c)
Explanation of Solution
False.
There was no such relation seen between inflation and M1 growth during this period. Although in the 1980s, inflation had steeply increased during the 1980s while M1 growth took time to increase till the 1990s. There was no such relation found in both the short and long-run periods.
d)
To find: People have trouble in making decision regarding nominal and real values.
d)
Explanation of Solution
False
People are unable to distinguish between the real interest rate and the nominal interest rate, which leads to money illusion. So, it leads to a wrong decision by the people in the economy. The real interest rate is a real phenomenon and the nominal interest rate is a monetary phenomenon. For example, money illusion exists in the following situation:
When inflation increases by 3% and the wage rate increases by 1%. And in another scenario the inflation rate increases by 2%. They both are the same situation but people will be unable to judge between both scenarios.
e)
To find: Central inflation have inflation rate of 4% around the world.
e)
Explanation of Solution
False.
Most of the central banks do not have a target of 4%, rather they consider 2% as the optimal inflation rate. This is because, at a zero inflation rate, the central bank cannot use its monetary policy while at a high inflation rate,
f)
To find: There is a positive relation between inflation rate and
f)
Explanation of Solution
True
As inflation increases, it leads to a monetary increase in money value, thereby nominal wealth also increases. Tax rates are imposed on nominal wealth which is increased due to the inflation rate, thereby increasing the
g)
To find:Taylor rule suggests central bank regarding inflation and recession.
g)
Explanation of Solution
True
The Taylor rule suggests that the Fed should increase its policy rates when inflation is high or when
h)
To find: Zero lower bound was a regular feature of monetary policy.
h)
Explanation of Solution
False
During the early years of the 1990s, when inflation targeting began, inflation was very high than today’s rate and liquidity trap was a theoretical phenomenon that did not exist at that time.
i)
To find:Quantitative easing is an effective monetary tool to affect yield on assets.
i)
Explanation of Solution
True
With the use of quantitative easing tools, the central bank can purchase assets from the market, which would increase the money supply in the economy, thereby increasing the inflation rate and decrease borrowing rates.
j)
To find: Central bank can provide liquidity to institutions which are not regulated.
j)
Explanation of Solution
True,
As the central bank is the lender of last resort, so any financial institution which is in crisis needs help from the central bank. It provides liquidity to the financial institution so that damage can be reduced and avoid depression in the economy.
k)
To find: The statement about crises is correct or not.
k)
Explanation of Solution
True
The Basel II and Basel III agreements are examples of actions taken as a consequence of the crises. These established a minimum ratio of capital to risk-weighted assets that are held by banks.
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Chapter 23 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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