Author Question: First, what can be done to increase central bank credibility? Second, why is central bank ... (Read 116 times)

kodithompson · **on:** Jun 30, 2018

First, what can be done to increase central bank credibility? Second, why is central bank credibility important?

What will be an ideal response?

Question 2

To what extent can changes in the rate of technological progress cause permanent changes in the rate of growth of output per worker? Explain.

What will be an ideal response?

mohan · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Central bank credibility can be achieved by: (1 ) imposing rules on the central bank; (2 ) making the central bank independent (of political pressure); and (3 ) choosing a conservative central banker. Central bank credibility is important to minimize the chances of occurrence of the time inconsistency problem. Also, whenever a central bank implements a disinflationary policy, the output effects will be smaller the more credible is the central bank.

Answer to Question 2

For example, an increase in the rate of TP will cause the required investment line to become steeper. K/NA and Y/NA will fall over time to some permanently lower level. The increase in the rate of TP will cause the rate of growth of Y and Y/N to increase over time and to reach a permanently higher level.