In: Economics
Suppose a central bank that has an inflation targeting mandate.
(a) Explain why such a mandate might lead to monetary policy becoming a stabilizing policy regarding real GDP. [Hint: Use an AD-AS diagram.] [5]
(b) Given the long and variable lags involved in the full effects of monetary policy being felt throughout the economy, is there any danger that the inflation mandate might turn out to be destabilizing (leading to wider swings in GDP)? Explain. [5]