As a central bank has greater independence from the government, the economy's inflation rate tends to : a. be larger be reduced. As expectations of inflation increase, firms and workers b. increase decrease wages and prices, therefore inflation c. decreases increases. A central bank's ability to maintain credibility on a policy to keep inflation low.

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Business

Aliyah Chen

4 February, 04:43

As a central bank has greater independence from the government, the economy's inflation rate tends to : a. be larger be reduced. As expectations of inflation increase, firms and workers b. increase decrease wages and prices, therefore inflation c. decreases increases. A central bank's ability to maintain credibility on a policy to keep inflation low.

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Answers (1)

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Kyle Mosley · Answer 1

Be reduced, or decrease.

Explanation:

An independent central bank can more easily reduce inflation and keep it low because it does not have fiscal or political pressures from governments.

Governments are always interested in keeping the economy growing and unemployment low, and if they have power over the central bank, they may turn to expansionary monetary policy by increasing the money supply, and thus, boosting economic activity.

However, it has been demonstrated that an excessive growth of the money supply leads to inflation, or even, to hyperinflation. This is why in the current year, Venezuela, a country whose central bank is not independent, is experiencing hyperinflation.

An indenpendent central bank can continue implementing a prudent monetary policy even if the economy is not growing a lot, unemployment is above the natural rate, and political pressure is high.