Reference no: EM132141975

Question: Some critics of discretionary monetary policies used by central banks suggest that there are lag problems in the timing of monetary policy, and there are problems with time inconsistencies, credibility and commitment to targets. These critics recommend that central banks be required to have only one single purpose. Two single purposes reviewed in the class and textbook were 1. a steady single rate of money growth and 2. a single targeted inflation rate.

a. Explain how a fixed growth rate in the money supply is supposed to provide stability in an economy. Indicate what assumptions must be met and how those assumptions may not be fulfilled.

b. In the case where the central bank is to achieve a targeted rate of inflation, indicate how the target is to be achieved with monetary policy. Then, indicate any problems with having a single targeted inflation rate for monetary policy.