If monetary policymakers cannot accurately forecast shifts in money demand, what are they really only left with for a short-term policy instrument and why?
What will be an ideal response?
If monetary policymakers cannot accurately forecast shifts in money demand, they cannot accurately forecast (predict) shifts in the velocity of money. As a result, if they try to target reserves or money growth, they potentially will create an environment of volatile interest rates, which would be very damaging to the real economy. Since this volatility and resulting damage is exactly what central bankers hope to avoid, they turn to the only viable short-term operating target left which is smoothing fluctuations in the interest rate.
You might also like to view...
People's abilities to bear risk increases with:
a. their abilities to understand the market. b. their abilities to diversify their asset holdings. c. their abilities to invest in risky assets over a large time period. d. their abilities to judge the probability of outcomes.
Corporate income taxes are based on the amount of revenue a corporation earns
a. True b. False Indicate whether the statement is true or false