Question

“Interest rates can be measured more accurately and quickly than reserve aggregates; hence an interest rate is preferred to the reserve aggregates as a policy instrument.” Do you agree or disagree? Explain your answer

Short answer

Disagree. The estimation of real interest rates requires appraisals of expected inflation, it isn't a fact that real interest rates are essentially estimated more accurately and more rapidly than reserves.

Step-by-step solution

Concept Introduction

Nominal interest rates are estimated more accurately and more rapidly than reserve totals, the interest-rate variable that is of more worry to policymakers is the real interest rate.

Explanation

Although nominal interest rates are estimated more accurately and more rapidly than reserve aggregates, the interest-rate variable that is of more worry to policymakers is the genuine interest rate. Since the estimation of real interest rates requires appraisals of expected inflation, it isn't a fact that real interest rates are essentially estimated more accurately and more rapidly than reserves. Interest-rate targets are in this way not really better than reserve targets.

Final Answer

Disagree with this statement. The estimation of real interest rates requires appraisals of expected inflation, it isn't a fact that real interest rates are essentially estimated more accurately and more rapidly than reserves.