Question

Current Federal Reserve policy focuses on interest rates, rather than on monetary aggregates, because ________. A) monetary aggregates do not provide clear or consistent signals to guide policymakers B) open market operations affect interest rates more directly than they affect monetary aggregates C) accor ding to the Fisher effect, the interest rate is a key determinant of the inflation rate D) all of the above E) none of the above

Answer 1

This is because there can be a weak relationship between the nominal income and the inflation (monetary variable and goal variable) in the economy, if the relation is weak it will not give the desired outcome to the policy makers. Under these circumstances the monetary targeting will not work and does not help to fix the inflation expectations.  The central bank focuses on interest rates rather than monetary aggregates because there is a weak relationship between the monetary aggregates and goal variable (may be inflation).

Ans: a) monetary aggregates do not provide clear or consistent signals to guide policymakers