Which of the Following Is the Most Appropriate Model for a Central

question 29

Multiple Choice

Which of the following is the most appropriate model for a central bank conducting discretionary stabilization policy?

• A) observe what the unemployment rate has been in recent periods, estimate the difference from the natural rate, and adjust the money supply accordingly
• B) observe the current level of GDP, estimate the output gap between actual and potential GDP, and adjust bank reserve requirements accordingly
• C) observe the past and current trade-weighted exchange rate, estimate the difference from purchasing power parity, and adjust income taxes accordingly
• D) predict the future inflation rate based on current and recent trends in economic variables, estimate the difference from the target rate, and tighten or loosen lending accordingly
• E) disregard current trends and simply keep the money supply growing at a rate equal to the long run growth rate of GDP

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Symbolic Notation

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Atomic Components

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