Question

Should the Fed Adopt a Fixed Formula for Monetary​ Policy? Some economists suggest that the Fed should follow an explicit rule or formula for monetary policy. For​ example, the rule would specify how interest rates would change based on changes in real GDP and inflation. Only with a fixed​ rule, these economists​ argue, would the public really understand the​ Fed's future intentions for policy. Because of the benefit of better public understanding and more transparency of the Federal​ Reserve, there do not appear to be any disadvantages of adopting an explicit rule or formula. A. True B. False

Answer 1

Correct Answer:

False

Explanation:

If Federal Reserve follows explicit policy, then public , firms and other institutions can expect and anticipate the   action to be taken up by the Federal Reserve. It will affect the behavior such as consumption, investment, lending and borrowing of these entities. Further, the market can also read what is expected   from the Fed. Such expectation is also not good from the perspective of policy planning.