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.

---

Definitions:

Assertiveness

The quality of being self-assured and confident without being aggressive, allowing for clear and respectful communication of one's opinions and needs.

Collectivism

A cultural value that prioritizes group goals over individual goals and emphasizes the importance of cohesion within social groups.

Uncertainty Avoidance

A cultural or individual preference for clear procedures and rules as a way to reduce the unpredictability of future events.

Hierarchy Orientation

A focus on the structure of ranking within an organization, emphasizing the roles, responsibilities, and power distribution among its members.