One of the potential difficulties in following a rules-based approach to monetary policy is:
A) that interest rates will be stable.
B) that the relationship between the money supply and inflation can be weak in the short run.
C) that the velocity of money is fully predictable.
D) that the policy outcome is desirable.

Question

Quizplus · Accepted Answer

The relationship between the money supply and inflation can be weak in the short run, making it difficult to follow a strict rules-based approach to monetary policy. This is because there are many factors that can influence inflation in the short run, such as changes in supply and demand in particular markets or unexpected shocks to the economy. Therefore, monetary policy makers may need to be more flexible and take into account other factors beyond just the money supply when making policy decisions.

One of the Potential Difficulties in Following a Rules-Based Approach