Answer to Question #237868 in Macroeconomics for Edemkb

Question

Explain whether each of the following statements is true, false, or could go either way, 

depending on the circumstances. If a question has more than one part, please explain 

why each part is true, false, or uncertain. Use the analytical tools learned in this course 

to back up your answers. EXPLANATION DETERMINES MARKS. 

a) The main reason why central banks tend to focus on the stabilization of core 

inflation when the prices of food and energy are high is that this is an effective 

way of distracting the public from the high level of headline inflation and thus 

to keep inflation expectations well anchored. 

 

b) The full employment level of output is the output level corresponding to an 

unemployment rate of zero. 

c) The Monetary Policy Committee of the Bank of Ghana after its meeting in 

November 2015 increased the monetary policy rate from 25% to 26%. This 

represents a 1% increase the monetary policy rate. 

Answer 1

(a) False - the correct reason is because interest rates and inflation rates are inversely related and the likely action of a central bank to lower or raise interest rates becomes more transparent under an inflation targeting policy, for instance, for stabilization of core inflation.

(b) False - full employment level of output does not mean zero employment, it means cyclical unemployment rate is zero. At this rate, number of job seekers is equal to the number of job openings i.e. the natural rate of unemployment.

(c) True - the change in monetary policy rate will be given by 26% minus 25% which is equal to 1%. This implies a 1% increase in monetary policy rate.