Macroeconomic Research

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Ch 24

2. True: Whether or not the monetary policy will be successful or not largely depends on the public perception of its potential to be effective

7. In such an event the consumers are going to pre-pone their future consumption to today given expected increase in inflation. Therefore, the AD curve will shift to the right resulting in temporary increase in output above Yp and inflation will increase before the government comes into power.

12. Constrained discretion is a middle ground of pursuing monetary policy between the two opposing views of following a strict rule based policy and following a discretion based policy. Under constrained discretion, the central bank can take discretionary decisions to stabilize output and employment in the event of short-term shocks, while maintaining a strong commitment to keeping inflation and its public expectations firmly under control. The outcome of pursuing constrained discretion vs discretion policy may differ in the eventual or short-term inflation. Under the discretionary policy, the inflation may breach the targets. Such breach is highly unlikely under constrained discretion.

15. True: As noted in response to question 2 above, the likelihood of any monetary policy largely depends on the public perception of whether or not the policy maker will be effective in implementing and executing the policy.

24. Country A’s central bank have more credibility than their counterparts in Country B. This is evidenced by the fact that Country A is able to revert to its long term inflation rate of 3% sooner than Country B. However, it is noteworthy that Country B is also pursuing a successful policy as evidenced by decreasing inflation after the shock, therefore its central bank are also credible, just that they are less credible than those in Country A.