[Related to the Making the Connection] The following appears in a Federal Reserv

Question

[Related to the Making the Connection] The following appears in a Federal Reserve publication:

"In practice, monetary policymakers do not have up-to-the-minute, reliable information about the state of the economy and prices. Information is limited because of lags in the publication of data. Also, policymakers have less-than-perfect understanding of the way the economy works, including the knowledge of when and to what extent policy actions will affect aggregate demand. The operation of the economy changes over time, and with it the response of the economy to policy measures. These limitations add to uncertainties in the policy process and make determining the appropriate setting of monetary policy...more difficult."

Source: Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and

Functions,

Washington, DC, 1994.

If the Fed itself admits that there are many obstacles in the way of effective monetary policy, why does it still engage in active monetary policy rather than use a monetary growth rule, as suggested by Milton Friedman and his followers?

Policymakers at the Fed believe that

A.

although it is not perfect, active monetary policy is still a stabilizing force in the economy.

B.

although it is not perfect, active monetary policy is still a destabilizing force in the economy.

C.

although it is not perfect, passive monetary policy is still a stabilizing force in the economy.

D.

the current practice of monetary policy is perfect.

Click to select your answer.

Explanation / Answer

Ans-

B.

although it is not perfect, active monetary policy is still a destabilizing force in the economy.

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