Practice question · Multiple choice
Why do central banks act on forecasts of inflation rather than waiting for inflation to appear?
Hints
- Think of turning a supertanker.
- When today’s medicine works only next year, you must dose for next year’s illness.
Show the answer
D. Rate changes take 6–24 months to affect prices
Why
Transmission lags mean today’s rate decision lands on next year’s economy. React only to current inflation and you are always fighting the previous war, usually overcorrecting into the next one.
Practise Monetary Policy
The app has 6 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Monetary Policy
- Order the transmission of a rate cut from decision to prices.
- Sort each situation by the monetary policy it calls for.
- Match each link of the transmission chain to its description.
- A central bank cuts rates to zero and the economy still stagnates. Why does the tool lose its grip there?
- Which effects follow a central-bank rate _cut_, all else equal?
- Banks hold a 25% reserve ratio. Set the slider to the money multiplier.