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Which of the following is a NOT an advantage to monetary targeting?
A) It relies on a stable money-inflation relationship.
B) There is a delayed signal about the achievement of a target.
C) It implies larger output fluctuations.
D) It implies a lack of transparency.
Answer: A
Diff: 1 Type: MC Page Ref: 18.1A- 4
Skill: Recall
Objective List: 18.1 Assess the different types of monetary policy strategy
If the relationship between the monetary aggregate and the goal variable is weak, then
____.
A) monetary aggregate targeting is superior to exchange-rate targeting
B) monetary aggregate targeting is superior to inflation targeting
C) inflation targeting is superior to exchange-rate targeting
D) monetary aggregate targeting will not work
Answer: D
Diff: 2 Type: MC Page Ref: 18.1A- 4
Skill: Recall
Objective List: 18.1 Assess the different types of monetary policy strategy
Why has the ECB seemed to have decided to try to "have its cake and eat it, too"?
Answer: The ECB's strategy is somewhat unclear and has been subject to criticism. Although
the "below, but close to, 2 percent" goal for inflation sounds like an inflation target, the ECB has
repeatedly stated that it does not have an inflation target. By not committing too strongly to
either a monetary-targeting strategy or an inflation-targeting strategy the ECB seems to have
decided to try to "have its cake and eat it, too." The resulting difficulty of assessing the ECB's
strategy has the potential to reduce the accountability of the institution.
Diff: 2 Type: SA Page Ref: 18.1A- 3
Skill: Applied
Objective List: 18.1 Assess the different types of monetary policy strategy
What are the advantages of monetary targeting?
Answer: One advantage of monetary targeting is that information on whether the central bank is
achieving its target is known almost immediately—figures for monetary aggregates are typically
reported within a couple of weeks. Thus monetary targets can send almost immediate signals to
the public and markets about the stance of monetary policy and the intentions of the
policymakers to keep inflation in check. In turn, these signals help fix inflation expectations and
produce less inflation. Monetary targets also allow almost immediate accountability for monetary
policy to keep inflation low, thus helping to constrain the monetary policymaker from falling
into the time-inconsistency trap.
Diff: 2 Type: SA Page Ref: 18.1A- 4
Skill: Recall
Objective List: 18.1 Assess the different types of monetary policy strategy