Q. After a few years of using the fiat system, the country of Malposneria decides to review its monetary institutions. Its economy has been quite volatile. Inflation has been high and the currency has depreciated. All this has caused foreign investment to drop dramatically. Currently, its central bankers are elected every two years. The country is considering a gold standard versus an independent central bank. What’s the best way to go? Why? Answer: Maplosneria should consider independent central bank over the gold standard. In the long run, the Independent central bank will be most suitable for a country with a volatile economy. It has certain advantages over the gold standard. Individuals have more certainty in the Central Bank; thus this serves to decrease inflationary expectations. This makes inflation low and steady. Another reason to keep Central banks independent from government in that governments have a tendency to settle on poor choices about fiscal strategy. Specifically when there is a tendency to be impacted by political contemplations. Therefore, when central bank is independent such ulterior motives of government officials have no impact on a country’s economic state. Typically before elections, governments are enticed to cut interest rates. This expands investment development, diminishes unemployment and increments the political back of the gathering. On the other hand, this expansionary monetary policy might prompt inflation and blast and bust economic cycles. Therefore, it is better to take financial approach out of government's hand so they are not able to play with a country’s economy for their personal gains. Another reason to choose Independent central bank over gold standard is that gold standard limits the economic growth. Therefore, the country should continue to have fiat system with Independent central bank.
Q. You’re running the central bank of a country called Econdavia. The central bank that you lead is not...
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