Chapter 15 – Central Banks in the World Today
99. What may be the reasons that explain the observation that during periods of hyperinflation
economic growth actually slows or even contracts?
100. Explain why inflation degrades the information content of prices.
Chapter 15 – Central Banks in the World Today
101. If one of the specific goals that central bankers focus on is economic growth, should they
aim for the highest short-term growth rate the economy can achieve? Explain.
102. We have a country, Fantasyland, where the current per capita real income is 20,000 units
of output, and the current average growth rate is 2.0 percent. What will be the difference in
the standard of living twenty years from now if Fantasyland grows at a rate of 3.5 percent and
we assume population is constant?
Chapter 15 – Central Banks in the World Today
103. Chapter 15 discussed the relationship between the level and volatility of growth. What is
that relationship and is its causality clear? Explain.
104. One of the specific goals for central bankers is financial system stability. Considering the
U.S., for example, would this imply that the Federal Reserve would always take action to
prevent any single bank from failing? Explain.
Chapter 15 – Central Banks in the World Today
105. How do the specific goals of interest rate and exchange rate stability differ in importance
from the other specific goals mentioned for central bankers?
106. What are the potential problems that can result if central bankers set a target of a zero
rate of inflation?
Chapter 15 – Central Banks in the World Today
107. Why might the central bankers in emerging market economies focus more attention on a
stable exchange rate than say the Federal Reserve or the European Central Bank?
108. Today there is a clear consensus about the best way to design a central bank. What are
the criteria for a successful central bank?
Chapter 15 – Central Banks in the World Today
109. The chairman of the Fed gives a speech and hints that, at the next meeting of the Open
Market Committee, the issues of a rapidly growing economy and preliminary indications of
rising prices will have to be addressed. You are in the market for a new house and your
mortgage broker calls to tell you that the interest rate on the $100,000, 30-year mortgage you
applied for has just increased by a quarter of a percent. Why did the rate increase even though
the Fed has not announced any rate change?
110. What do you think is meant by the statement,”successful monetary policy requires
competent people and the right institutional environment”?
Chapter 15 – Central Banks in the World Today
111. What are the operational components of central bank independence?
112. The text points out that the apparent result of central bank independence has been better
performing economies. Why do you think it took so long for many countries to create
independent central banks?
Chapter 15 – Central Banks in the World Today
113. The Federal Reserve didn’t always communicate its actions to the public like it does
today. As recently as the mid 1990s, secrecy ruled. Why do you think the Fed and most
central banks now are more public about their actions and the reasons for them?
114. Provide an example where monetary policymakers in the United States would be put in a
position of conflicting goals and as a result forced to make a tradeoff.
Chapter 15 – Central Banks in the World Today
115. Imagine a central banker who takes office believing that, ultimately, the best way to
stimulate an economy is to keep people guessing. This means the policymaker will often, but
not always, announce one change but then actually do something else. What do you think of
the central bank’s chances for achieving its objectives and why?
116. Using the U.S. as an example, explain why rising budget deficits on the part of a federal
government creates a potential point of conflict between fiscal and monetary policymakers.
Chapter 15 – Central Banks in the World Today
117. Why might Congress actually prefer the higher rate of inflation that might result from
deficit spending to higher taxes and or a cut in government spending?
118. Explain why inflation is a way for governments to default on a portion of the debts they
owe.
119. Popular discontent with the bailouts of large financial firms has fueled a congressional
attack on Fed independence. What are the main reforms included in the 2010 legislative
proposal?
Chapter 15 – Central Banks in the World Today
Essay Questions
120. Why do you think price stability is the major goal for almost every central banker?
121. There are a group of financial advisors and writers in the U.S. that are casually referred
to as Fed Watchers or Fed Speculators. After studying Chapter 15, what do you think they do
and why might people listen to them?
Chapter 15 – Central Banks in the World Today
122. Predict how monetary policymaking would change, if at all, if members of the Board of
Governors of the Federal Reserve were popularly elected to two-year terms and could run for
re-election.
Chapter 15 – Central Banks in the World Today
123. Most military historians will point out that successfully waged battles and wars are often
the result of having an exceptional individual in charge. At the same time, it seems that
monetary policymaking seems to do well when policy is made by a committee. Contrast the
two situations and discuss why a committee for monetary policymaking would be superior.