Chapter 17.3, Problem 4R

To determine

To evaluate the reason behind MF wanting the government to follow a monetary rule.

Explanation of Solution

MF claimed that monetary policy is much more successful than fiscal policy. Fiscal stimulus contributes to the money supply, but creates a deficit which adds to the sovereign debt of a nation. That will drive up interest rates.

It was believed that central banks are better than government because they regulate the money supply. They also prefer to observe actual, rather than nominal, interest rates. Most reported rates are nominal rates, whereas actual rates do away with inflationary effects. Real rates offer a more accurate image of money's expense.

There is decrease interest rates as the money supply increases. This is because banks have plenty to lend, so they're prepared to charge lower rates. That means consumers are borrowing more to purchase items like homes, cars and furniture. Reducing the supply of capital increases interest rates and makes loans more expensive this reduces economic development.

Economics Concept Introduction

Introduction:Monetary policy is mainly concerned with interest rate management and total circulating money supply, and is usually performed by central banks, such as the US. Federal Reserve. Central banks have typically used monetary policy either to stimulate an economy, or to control its expansion.