Question

When deciding whether to tighten or loosen monetary policy, central banks weigh the relative risks to price stability and growth. Mention two indicators that the MPC use to gauge the risk to inflation and two indicators the MPC use to gauge the risk to growth.

Answer 1

Central banks use monetary policy tools to keep economic growth in check and stimulate economies out of periods of recession.

While central banks can be effective, there could be negative long-term consequences that stem from short-term fixes enacted in the present.

Fiscal policy are the tools used by governments to change levels of taxation and spending to influence the economy.

Fiscal policy can be swayed by politics and placating voters, which can lead to poor decisions that are not informed by data or economic theory.

If monetary policy is not coordinated with fiscal policy enacted by governments, it can undermine efforts as well.

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