Economics - Economics Section 2
- Option : B
- Explanation : The central bank’s policy rate works through the economy via interconnected channels. An increase in the official interest rate will put a downward pressure on inflation.
62. The credibility of a central bank is important because:
- Option : B
- Explanation : If a central bank operates within an inflation-targeting regime and if economic agents believe that it will achieve its target, this expectation will become embedded into wage negotiations, for example, and become a self-fulfilling prophecy.
- Option : C
- Explanation : Central banks that are both operationally and target independent, not only decide the level of interest rates, but they also determine the definition of inflation that they target, the rate of inflation that they target, and the horizon over which the target is to be achieved.
- Option : A
- Explanation : Banks tasked to hit a definition and level of inflation determined by the government are operationally independent. Target independent banks also determine the definition of inflation, the rate of inflation, and the horizon over which the target is achieved
65. If a central bank increases the money supply, this move will most likely lead to a:
- Option : A
- Explanation : An increase in the money supply leads to a decrease in nominal rates. Furthermore, on the basis of quantity theory of money, an increased money supply makes money less valuable, which increases aggregate price levels.
