Central banks generally conduct their monetary policy with two goals in mind: to keep economic activity high and to keep inflation low; however, they have to recognize that
A)there is an inherent conflict between these goals
B)monetary policy can affect economic activity only in the short run
C)they can control inflation fairly effectively but may not be able to influence GDP growth
D)a lower interest rate now may mean higher a inflation rate in the future
E)all of the above

Question

Quizplus · Accepted Answer

All of the above statements are true. There is often a trade-off between economic activity and inflation, as stimulating the economy may lead to higher inflation, while reducing inflation may lead to lower economic growth. Monetary policy can have short-term effects on economic activity but may not be able to influence long-term growth trends. Central banks can control inflation to some extent but may not be able to guarantee stable economic growth. Finally, lowering interest rates now may lead to higher inflation in the future, as it increases demand for goods and services in the present.

Central Banks Generally Conduct Their Monetary Policy with Two Goals