Explain why giving an independent central bank control over the quantity of money in the economy should reduce the occurrences of periods of extremely high inflation, especially in developing economies.
Answer to relevant QuestionsIf velocity were predictable but not constant, would a monetary policy that fixed the growth rate of money work? Using the same graph as that described in Problem, show how the central bank could use its control over the quantity of money to target a particular interest rate in the face of changes in velocity. Comment on the role given to money in the monetary policy strategy of the ECB. In theory, the velocity of money should rise with the cost of holding it. To assess the theory, plot the opportunity cost of holding M2 – defined as the difference between the three-month Treasury bill rate (FRED code: ...Economy A and Economy B are similar in every way except that in Economy A, 70percent of aggregate expenditure is sensitive to changes in the real interest rate and in economy B, only 50 percent of aggregate expenditure is ...
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