Chapter 15 - Assignment 2: A Case for Independence

Read Stanley Fischer's article: "Central Banking: The Challenges Ahead."

  1. According to Fischer, why might there be a short-run inflationary bias under a politically controlled macroeconomic policy? Is this argument similar to the "political business cycle" argument?
  2. What does the empirical evidence suggest about the relationship between central bank independence and inflation rates?
  3. Use AD and AS curves to illustrate Fischer's argument that there is no conflict between the goals of maintaining full-employment and price stability when demand shocks occur.
  4. Use AD and AS curves to illustrate the conflict between full-employment and price stability goals when supply shocks occur.
  5. Why does Fischer advocate the use of an inflation target for a central bank?
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