If a central bank is uncertain about whether an economic disturbance is temporary or permanent, it should
A)always wait until the full effect of the disturbance is felt before undertaking any policy changes
B)make frequent and modest policy changes and adjust policies whenever necessary to reach a sustainable goal
C)announce and then implement major policy changes right away to signal to financial markets that it will address the disturbance vigorously
D)announce a policy change and then wait for financial markets to react, which is often all that is needed to calm economic activity
E)do all of the above

Question

Quizplus · Accepted Answer

Making frequent and modest policy changes allows the central bank to adjust its policies as more data becomes available on whether the disturbance is temporary or permanent. This approach also avoids overreacting to temporary shocks or being slow to react to permanent changes in the economy.

If a Central Bank Is Uncertain About Whether an Economic