Explain why giving an independent central bank control over the quantity of money in the economy...

Explain why giving an independent central bank control over the quantity of money in the economy should reduce the occurrences of periods of extremely high inflation, especially in developing economies.

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Expert Solution

Inflation is a monetary phenomenon and the quantity theory of money states that high growth in money and high inflation rates both goes together. The central bank of the country can influence the supply of the money in the economy which is equal to demand of money in equilibrium and it is also equal to quantity of money in the economy. Therefore they can also influence the growth of money if they are working independently to control over the quantity of money in the economy. They can take into consideration the concerns for inflation when deciding how much money to print. Maintaining the independence of central bank is sometime difficult in developing economies as the interventions of government is more in monetary policy of such countries. Therefore giving an independent central bank control over the quantity of money in the economy can reduce the occurrences of periods of extremely high inflation, especially in developing economies.

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