What is wrong with this argument

Assignment Help Macroeconomics

Reference no: EM131167782

A central bank that adopts a fixed exchange rate may sacrifice its autonomy in setting domestic monetary policy. It is sometimes argued that when this is the case, the central bank also gives up the ability to use monetary policy to combat the wage-price spiral. The argument goes like this: "Suppose workers demand higher wages and employers give in, but the employers then raise output prices to cover their higher costs.

Now the price level is higher and real balances are momentarily lower, so to prevent an interest rate rise that would appreciate the currency, the central bank must buy foreign exchange currencies and expand the money supply.

This action accommodates the initial wage demands with monetary growth, and the economy moves permanently to a higher level of wages and prices.

With a fixed exchange rate, there is thus no way of keeping wages and prices down."

What is wrong with this argument?

Reference no: EM131167782

Questions Cloud

Different currencies are all perfect substitutes : Can the same problem arise under a reserve currency standard when bonds denominated in different currencies are all perfect substitutes?

Methods in which congress can control federal bureaucracy : List and describe four methods in which the president can control the federal bureaucracy. List and describe four methods in which the Congress can control the federal bureaucracy

How many register windows would be available for use : How many registers would be available for use by input parameters? How many registers would be available for use by output parameters? How many register windows would be available for use?

What are some of the agreements that might be needed : The owner of the warehouse is retiring and is open to the idea of selling or renting the space. How might the business be structured? What might be some of the legal issues that could arise in operating the business and selling the product? What a..

What is wrong with this argument : With a fixed exchange rate, there is thus no way of keeping wages and prices down - What is wrong with this argument?

How many local registers are in each register window set : The 10 register windows each have 6 input registers and 6 output registers. How many local registers are in each register window set?

Is given statement true or false : "Assuming that everything else remains constant, a decrease in the test's level of significance (α) leads to a higher probability of rejecting the null hypothesis." - Is this statement true or false?

How many total registers are in the given cpu : A RISC processor has 8 global registers and 10 register windows. Each window has 4 input registers, 8 local registers, and 4 output registers. How many total registers are in this CPU?

Summarize the state law in your state on the regulation : Discuss whether you agree with your state's position on regulating prescription drugs via the internet. Indicate whether you favor less state regulation, or more state regulation.

User Account

All Pages