Question

Provide in each case a brief explanation articulating why the statement may be true, false or even uncertain.

Price stability is a natural long-run monetary policy goal for a central bank much more so than attaining sustainable full employment. (Word limit 300)

Answer 1

Correct.

Price stability should be first and the last goal of every Central Banks. Moreover, every Central Bank is formulated with the objective of keeping the inflation anchored.

Sustainable full employment can be sustained in the long run through government intervention. Fiscal measures taken by the Government play a major role in sustaining the economy at full potential level of employment. Central Bank's role here should be restricted till certain boundaries and the bank should be allowed to act and take decisions independently.

There is also some credibility associated with Central Bank's policies. People increase this credibility based on Central Bank's ability to keep the price low and controlled over a period of time. Doing so, gives an immense boost to consumer and investor confidence indicating to them that their invested money has stable value and will not deteriorate with the time.

Price stability in the long run by the Central Bank also brings financial stability. If the Central Banks fails to anchor the inflation well, then forecasting in the financial market regarding rate of returns on projects would become unreliable. A situation can trigger financial stress if resource misallocation occur.

By using effective monetary policy, the Central Bank can remove the uncertainty from the market regarding the changes in supply and demand and their causes.

Effective anchoring of the inflation rate over the long run will give a green signal to the consumers, investors that their money is intact which will boost more investment and spending into the economy.

A good mix of both Monetary Policy from the Central Bank and the Fiscal Policy from the Government can be formulated in order to achieve the twin objectives of price stability and full employment.

Due to the above benefits derived from maintaining price stability, the Central Bank's primary and last objective should be to keep the inflation trend constant over the period of time.

If Central Bank takes care of price stability then the goal of sustaining full employment output can be automatically achieved

(334 words)

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