Of the following targets or nominal anchors, which is not useful for controlling domestic inflation?

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The question asks which target or nominal anchor is not useful for controlling domestic inflation. Here are the options unpacked one by one.
Option 1: nominal interest rates. Policy makers frequently use the policy rate (a nominal interest rate) as a primary instrument to influence inflation and aggregate demand. Adjusting the nominal rate affects borrowing, spending, and investment, which in turn impacts price pressures. This makes nominal interest rates a useful inflation control anchor.
Option 2: real money demand measures. Real money demand is the quantity of money households want to hold after adjusting for the price level and is influenced by income, interest rates, and expectations, not a direct policy target. Using real money demand as an anchor would be indirect and unstable for controlling inflation, since it is endogenous and reflects behavioral responses rather than a prescriptive tool for stabilizing prices. This makes it not useful as a controlling target.
Option 3: money supply measures. For many decades, money supply aggregates served as a key nominal anchor in monetarist frameworks to control inflation. While the effectiveness varies over time and country, money supply targets have been used explicitly as inflation-control measures in several policy regimes. Therefore, they are considered useful as anchors in monetary policy.
Option 4: nominal exchange rates. Exchange-rate targeting can influence domestic inflation by passing through external price pressures and affecting import prices. In some economies, a nominal exchange rate peg or regime is used as an inflation-control mechanism, especially to anchor expectations and stabilize prices via external discipline. Thus, it can be a useful inflation anchor.
In summary, among the options, real money demand measures stand out as not being a direct or reliable tool for controlling domestic inflation, whereas the other targets have clear roles in inflations-focused policy frameworks.

01:220:300:01 INTERNATIONAL ECON General long-run FX model practice questions (not for credit)

Of the following targets or nominal anchors, which is not useful for controlling domestic inflation?

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01:220:300:01 INTERNATIONAL ECON General long-run FX model practice questions (not for credit)

Of the following targets or nominal anchors, which is not useful for controlling domestic inflation?

View Explanation

Log in for full answers

Similar Questions

Which of the following agencies has primary responsibility for setting monetary policy and regulating the banking system?

Why is psychology important in a country’s monetary policy?

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The RBA can stimulate the economy by _____, all of which shifts the aggregate demand to the _____.

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Select the option that correctly shows all the missing words in the following sentence.Monetary policy is the management of ________ by changing money _______ for the purpose of adjusting aggregate _____.

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