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CLASS ACTIVITY
Qno.1 What are the goals of monetary policy? Briefly explain them.
Answer:
Following are the five goals pointed out by central bank which comes under the
objectives of monetary policy.
1. High Employment:
High employment is an efficient goal due to two main causes i.e. the
alternative situation, high unemployment causes much human misery, and when
unemployment is high, the economy has both idle workers and idle resources (closed
factories and unused equipment), resulting in a loss of output (lower GDP). For instance,
a laborer who chooses to search for a superior occupation may be jobless for some time
during the work search. Laborers frequently choose to go home briefly to seek after
different exercises (raising a family, travel, getting back to class), and when they choose
to reappear the work market, it might take some effort for them to secure the correct
position. Another explanation that joblessness isn't zero when the economy is at full
business is underlying joblessness, a confuse between work prerequisites also, the
abilities or accessibility of nearby laborers. Obviously, this sort of joblessness is
unfortunate.

2. Economic Growth:
The objective of consistent economic growth is firmly identified
with the high-work objective since organizations are bound to put resources into capital
hardware to build profitability and financial development when joblessness is low. Then
again, if joblessness is high and industrial facilities are inactive, it doesn't pay for a firm
to put resources into extra plants and hardware.

3. Stability of Financial Markets:

Monetary emergencies can meddle with the capacity of
monetary business sectors to channel assets to individuals with beneficial speculation
openings and lead to a sharp constriction in financial movement. The advancement of a
steadier monetary framework in which monetary emergencies are evaded is hence a
significant objective for a central bank.

4. Interest-Rate Stability:
Interest-rate stability is desirable because fluctuations in interest
rates can create uncertainty in the economy and make it harder to plan for the future.
Fluctuations in interest rates that affect consumers willingness to buy houses. The
soundness of monetary business sectors is additionally encouraged by loan fee
dependability, on the grounds that vacillations in loan fees make extraordinary
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vulnerability for monetary organizations. An increment in loan fees creates huge capital
misfortunes on long haul bonds and home loans, misfortunes that can cause the
disappointment of the monetary establishments holding them.

5. Stability in Foreign Exchange Markets:

With the expanding significance of global
exchange to the U.S. economy, the worth of the dollar comparative with different
monetary forms has become a significant thought for the taken care of. In addition,
preventing large changes in the value of the dollar makes it easier for firms and
individuals purchasing or selling goods abroad to plan ahead. Stabilizing extreme
movements in the value of the dollar in foreign exchange markets is thus an important
goal of monetary policy.

Qno.2 What role does a central bank play in an economy? Should the
central bank work independently? What are the advantages and
disadvantages of having a independent central bank?

 Role of Central Bank in economy:

Central banks play a crucial role in
ensuring economic and financial stability. They lead money related arrangement
to accomplish low and stable expansion. In the wake of the worldwide monetary
emergency, national banks have extended their toolboxes to manage dangers to
monetary soundness and to oversee unpredictable trade rates.

 Should the central bank work independently:

Yes central bank should
work independently, The idea is that Central Banks will be more independent of
political considerations and willing to keep inflation low even if there are political
costs to raising interest rates.

 Advantages:
1. Leaves ventral banks free to conduct monetary policy free
of political interference.
2. Delivers better inflation outcomes without compromising
economic growth.
3. Insulates central banks from populism and nationalism.

 Disadvantages:
1. Insulates monetary policy from democratic
processe,
2. Leads to policy failures that might be prevented by
political oversight.
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3. Can lead to monetary and fiscal policy pulling in

opposite direction.

Qno.3 What are asset price bubbles? Should central banks

intervene when asset price bubbles are formed?

 An asset bubble occurs when the price of an asset, such as stocks, bonds, real
estate, or commodities, rises at a rapid pace without underlying fundamentals,
such as equally fast-rising demand, to justify the price spike.

 Central banks should not intervene in asset price bubbles. Bubbles generally arise
out of some combination of irrational exuberance, jumps forward in technology,
and financial deregulation. A central bank is probably not going to convince
speculators by raising loan costs that the air pocket is vaporous or that they won't
at last locate some more noteworthy idiot to whom they can sell. More significant,
the expense of air pockets blasting to a great extent relies on the structure and
delicacy of the economy's monetary framework. An appropriately administered,
controlled monetary framework won't experience the ill effects of an air pocket
extending and blasting. On the off chance that the monetary framework is delicate
or inappropriately administered, at that point money related fixing will be much
more expensive in genuine financial terms. There is no money related substitute
for monetary security and no market substitute for financial simplicity during a
serious credit crunch.

Qno.4 What are the benefits of using a nominal anchor for the
conduct of monetary policy?

A nominal anchor helps promote price stability by tying inflation expectations to

low levels directly through its constraint on the value of money. It can also limit
the time-inconsistency problem by providing an expected constraint on monetary
policy.