When the Link Between M1, M2, and Inflation Broke Down

question 16

Multiple Choice

When the link between M1, M2, and inflation broke down in the 1980s, many economists argued that the best policy approach was to have an explicit inflation target. The biggest problem with an explicit inflation target is

• A)that it requires perfect foresight on the part of the Federal Reserve because of the lagged impact of monetary policy instruments.
• B)determining what that target should be.
• C)that it puts too much emphasis on stable prices over other possible goals for monetary policy.
• D)determining which measure of inflation to use.

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Definitions:

Perceptual Process

The sequence of steps that includes receiving, selecting, organizing, and interpreting sensory information.

Interpretation

The act or process of explaining the meaning of something, often involves understanding the significance of words, actions, or events.

Causal Attributions

The process of trying to determine the causes of specific events, especially regarding understanding behaviors and outcomes in social settings.

Task Difficulty

The perceived level of challenge presented by a task, which can influence motivation and performance.