Question

1) Outline a short argument for or against having monetary policy conducted according to set rules instead of more flexible policy

2) Provide three possible downsides of high levels of government debt

Application to Data: Use data on the yields of U.S. Treasury Bonds to infer inflation expectations.

Answer 1

Answer 1:

Monetary Policy involves changes in the amount of money supplied and interest rates set by the Central Bank. This policy along with other policies has helped the country to overcome Great Recession of 2007 when the Central Bank Increased money supply to increase overall aggregate demand in the economy and overcome recession. Some of the arguments in favor of monetary policy are:

1. Targeting of interest rates by the Central Bank helps in controlling the level of inflation in the economy. When inflation is high then money supply in the economy is reduced to decrease aggregate demand and thus control inflation rate.

2. Monetary Policy can be implemented easily As the monetary policy tools can be implemented easily.

3. In most of the countries around the world, the Central Banks are independent and politically neutral, thus the policy which is fit for the economy can be undertaken.

4. When the Central Bank increases the level of money supplied, it reduces the rate of interest and this leads to capital outflow and thus depreciation of currency which can help in increasing exports and thus increasing Net exports of the nation and improving trade balance.