(Solved): 2. (20+10 points) The chart below shows the inflation rate in Turkey and the inflation target (set ...

2. (20+10 points) The chart below shows the inflation rate in Turkey and the inflation target (set by the central bank of Turkey) from 2011 to present. Observe that the central-bank has failed to keep the inflation rate at around its target, Le., the inflation rate his persistently exceeded the inflation target in Turkey during this period. 25 Inflation InflationTarget 2020 2015 2014 2012 2016 Suppose that (i) you are the chief economist in the central bank of Turkey, (i) you are totally independent of any political pressure while making monetary policy decisions, (iii) according to the Constitution of Turkey, your sole responsibility is to bring the inflation. rate to the inflation target. (i) Given the figure, would you follow expansionary (increase in money supply) or con- tractionary (decrease in money supply) monetary policy? Why? Explain. (ii) The central bank uses three tools to control the money supply: (a) changing required reserve ratio, (b) setting discount rate, and (c) open market operations. Which mon- etary policy tool would you use to conduct this policy? Why? Explain. 8 15 10