Question

Inflation, Disinflation, and Deflation - Discovering Data The accompanying graph plots the size of the monetary base in the United States over time. ALFRED il - Monetary Base: Total Vintage: 2017-12-28 4,000,000 3,600,000 3,200,000 2,500,000 2,400,000 2,000,000 1,600,000 1,200,000 800,000 400,000 2002 2004 2005 2006 2010 Millions of Dollars 2012 2014 2016 Source: Board of Governors of the Federal Reserve System (US) Customize | Download Data | FRED - Economic Data from the St. Louis Fed c. Why is it important for the central bank to be independent from the part of the government responsible for spending? If not independent, the government might be tempted to have the central bank print more money (creating deflation) whenever the government runs a budget surplus. If not independent, the government might be tempted to have the central bank print more money (creating inflation) whenever the government runs a budget deficit. The Federal Reserve is, historically, driven by political ideologies. Allowing it to influence the rest of government could harm its ability to enact effective monetary policy.

Answer 1

Central banks are more independent of political considerations and they target low inflation rate. If not independent, the government might be tempted to have the central bank print more money (and thus creating inflation) whenever the government runs a budget deficit.

Answer: option B