Question

Does Central Banker’s often worry about 1) citizens have adaptive expectations rather than rational expectations 2) Cyclical budget deficits reducing the contraction in output due to a recessionary shock 3) increasing anticipated growing inflation for future 4) Prime Minister's pressure to reduce interest rate 5) none of the above?

Answer 1

The Central Bankers are a group of those, that decide the monetary policy of a nation. These people have great bearing on the interest rates in any economy and the total flow of money in a country is directly decided by them.

They regulate the flow of money, primarily when the money in circulation is high (Inflation) or low (recession) to ensure that an economy can remain stable over the years.

The following are the specifics of the case as above: -

1) Citizens Adaptive expectations: -

The central bankers cannot control consumer expectations and their rationality what they can do is regulate the market with devices such as Cash Reserve Ration which is the minimum amount of money which commercial banks must hold with the Central Bank or other similar variables such as the rate at which it charges banks for taking loans.

This is thus, not a topic which bothers the central bank and its policies even though it may affect the market. This option thus is false.

2) Cyclical Budget Deficits and Recession

A recession shock, is indeed a cause of concern for central bankers. and they indeed will worry about the same and increase the flow of money in the economy, to correct the same. They do so by regulating the interest rates and reducing reserve requirements for commercial banks and being able to increase the flow of money in the economy.

This option therefore is true

3) Increased Anticipated Inflation: -

The Central Bank indeed worries about anticipated inflation if the markets reply back with the same answer that inflation may take over the economy. They take corrective measures such as increasing the interest rates, increasing the reserve requirements for commercial banks and many similar available options if they believe that the inflation would rise.

This option therefore is true

4) President wanting to change the interest rates: -

The Central Banks are independent in setting the interest rates. They do not view opinions of presidents towards doing what is right int he economy. The banks function independently and are away from government control.

Therefore, the option is false

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