Part 1Critics of Fed independence argue that:Part 2
A. it is undemocratic to have monetary policy controlled by an elite group responsible to no one B. the Fed, since it does not face a binding budget constraint, spends too much of its earnings C. an independent Fed conducts monetary policy with a consistent inflationary bias D. Only A and B are correct

Question

Part 1Critics of Fed independence argue​ that:Part 2
A. it is undemocratic to have monetary policy controlled by an elite group responsible to no one B. the​ Fed, since it does not face a binding budget​ constraint, spends too much of its earnings C. an independent Fed conducts monetary policy with a consistent inflationary bias D. Only A and B are correct

BlackTom AI · Accepted Answer

Rewriting the question in my own words helps set the stage: Critics of Fed independence argue about whether monetary policy should be insulated from political pressures and who gets to influence policy decisions.
Option A: 'it is undemocratic to have monetary policy controlled by an elite group responsible to no one' This argument centers on the democratic legitimacy of an independent central bank. The concern is that a non-elected, technocratic body makes policy without direct accountability to voters. The plausibility of this critique rests on the principle that policy should reflect public input and political oversight, raising questions about legitimacy and democratic control.
Option B: 'the Fed, since it does not face a binding budget constraint, spends too much of its earnings' This claim targets the financial autonomy of the Fed, suggesting it could overspend because it operates with a degree of budgetary independence. The key idea is that lack of a strict budget constraint might give the Fed leeway to allocate resources or finance operations in ways that critics deem excessive or less accountable. A common critique is about fiscal discipline and transparency, even though the Fed’s profits are typically remitted to the Treasury.
Option C: 'an independent Fed conducts monetary policy with a consistent inflationary bias' This statement would assert that independence guarantees a particular bias—specifically inflationary—which would run counter to the widely cited goal of price stability. In fact, many analyses of independence emphasize that it helps reduce political business cycle effects and can improve inflation performance, though debates exist about whether any bias persists. This option asserts a particular unfavorable outcome that is not universally supported by the literature.
Option D: 'Only A and B are correct' This option is presenting a synthesis: it agrees that the two concerns in A and B are the only relevant critiques, and it excludes the inflationary-bias claim from C. To evaluate this, one would weigh whether C is an accurate description of the standard critique. If C is interpreted as a blanket claim about independence causing inflationary bias, many economists would challenge that universal claim, though some may debate the magnitude or presence of any bias. 
Putting it together, Option A highlights democratic legitimacy concerns, and Option B raises questions about budgetary accountability and resource use. Option C makes a claim about inflationary bias that is more contested in the literature. Option D combines A and B, effectively saying those are the only valid criticisms, which hinges on whether you accept that C is incorrect or less central. The reasoning here shows that the core criticisms about democracy and budget autonomy are commonly discussed, while the notion of a consistent inflationary bias from independence is more nuanced and contested. 
In summary, the analysis contrasts democratic accountability and budgetary constraints with the debate over inflationary bias, highlighting why some critiques emphasize A and B while others challenge or downplay C. The overall interpretation suggests that the composite claim in D aligns with the view that A and B are the main criticisms, whereas C is not universally accepted as a defining drawback of independence.

Homework:Chapter 16 Homework

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