Critics of the Fed's use of financial variables as targets have proposed that the Fed
A)use indicator variables such as nominal GDP, the yield curve, and the exchange rate.
B)abandon open market operations and use only discount loans and changes in the required reserve ratio as tools.
C)should concentrate solely on its role as lender of last resort.
D)be made subordinate to the Treasury.

Question

Quizplus · Accepted Answer

Critics of the Fed's use of financial variables as targets have proposed that the Fed should use indicator variables such as nominal GDP, the yield curve, and the exchange rate instead. These alternative indicators may provide a better signal of the state of the economy and help the Fed achieve its dual mandate of price stability and maximum employment. Abandoning open market operations (B) would severely limit the Fed's ability to control the money supply and implement monetary policy. Concentrating solely on its role as lender of last resort (C) would not address the Fed's broader responsibilities. Making the Fed subordinate to the Treasury (D) would compromise the Fed's independence and potentially lead to politicization of monetary policy.

Critics of the Fed's Use of Financial Variables as Targets