Potential Weaknesses of Nominal GDP Targeting Include

question 26

Multiple Choice

Potential weaknesses of nominal GDP targeting include

• A)it is more complicated to explain to the public than inflation targeting and thus the public might be confused about the objectives of the central bank.
• B)it implies that the central bank will respond to slowdowns in the real economy even if inflation is not falling.
• C)real GDP growth that is below potential or inflation that is below the inflation objective will encourage more expansionary monetary policy.
• D)it focuses not only on controlling inflation but also explicitly on stabilizing real GDP.

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Definitions:

Overapplied

This refers to the condition in which the allocated costs in an accounting system exceed the actual costs incurred, often in the context of overhead or indirect costs in manufacturing.

Variable Component

Part of a cost or expense that changes in proportion with the level of activity or volume of output.

Fixed Component

A portion of a cost that does not change with the level of production or sales over the short term.

Overapplied

A scenario in which the overhead costs allocated are higher than the overhead costs that were actually incurred.