Why is it important for the central bank of a country to be independent?
(i) The central bank needs to be free from political pressures.
(ii) Research has shown that inflation tends to be lower where central banks have greater independence.
(iii) The central bank needs to ensure that it has the freedom to set the federal funds rate at one fixed level.
(iv) The central bank needs to ensure that the Federal Reserve governor never has to testify before Congress.
A)(i) and (ii)
B)(ii) and (iii)
C)(ii) and (iv)
D)(i), (iii), and (iv)

Question

Quizplus · Accepted Answer

(i) Independence from political pressures allows the central bank to make decisions based on economic indicators rather than political considerations, which can lead to more stable and effective monetary policy. (ii) Empirical research supports the observation that countries with independent central banks tend to experience lower inflation rates, as these banks can focus on long-term economic stability without being influenced by short-term political goals.

Why Is It Important for the Central Bank of a Country