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FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust

A risk manager at an asset manager reviews the BIS discussion of how central banks safeguard stability and trust. Which statement best captures the primary mandate of most central banks in relation to inflation?

Most central banks have price stability as their primary mandate, keeping inflation low and stable. Doing so anchors expectations and builds credibility and trust. Deficit financing and permanent exchange-rate fixing are not core mandates, and employment goals do not generally override price stability.

  1. AMaintaining price stability by keeping inflation low and stable, which supports the central bank's credibilityCorrect
  2. BTargeting full employment as a goal that always overrides inflation
  3. CFinancing government deficits whenever fiscal revenue falls short
  4. DFixing the exchange rate of the domestic currency in all circumstances

Explanation

Price stability is the core mandate of most central banks, and delivering it builds credibility and anchors expectations. Employment goals may appear in some mandates but do not override price stability. Deficit financing undermines independence, and rigid exchange-rate fixing is not a universal mandate.

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