Suppose in an election year, the economy declined into a depression. at the same time, clear signs of inflationary pressures were apparent. how might the central bank with a primary goal of price stability react? how might members of the incumbent political party who are up for re-election react?

The Central Bank has the prerogative to conduct a country's monetary policy. In a situation of inflationary economic crisis, the Central Bank must adopt a contractionary monetary policy, that is, raise the interest rate and sell government bonds. In this way, the Central Bank encourages people to save and decreases the money in circulation. Since inflation is a monetary phenomenon, ie caused by the excess of currency in circulation, these measures tend to cool inflation.

From the perspective of party members, a contractionary monetary policy in an electoral period is considered bad, as this decreases economic activity and increases the sense of crisis in the population, which may have a strong bearing on the electoral process. However, the Central Bank must act independently, without worrying about political pressure, as its sole function is to maintain the stability of the financial system. In this way,political authorities should talk about the reality of the economic situation and explain the need for measures to solve economic problems.

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answerup to (3) three years;