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Suppose
you are advising the central bank on monetary policy. Here is the situation:
the economy has been sliding into a recession but the government is reluctant
to increase spending or to cut taxes because of political considerations
(they have a bad "tax and spend" reputation). Those responsible for the
central bank's operations are inclined to be active in their attempts to
influence the performance of the economy. What specific policy measures
would you recommend to deal with the problem?
Now suppose that there is
simultaneously a growing public concern over the low value of the country's
currency on the international exchange market. You have been reminded that
the central bank is held responsible for the management of the currency's
external value and the political authorities would not like to see the
currency decline any further. Would this influence your recommendations?
Explain.
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