Those who believe the central bank should aim for zero inflation argue that reducing inflation is a policy with temporary costs and permanent benefits. What are the primary costs and benefits they are referring to?
Reducing inflation is likely to result in a temporary period of high unemployment and low output. Once people understand that policymakers are aiming for zero inflation, however, expectations of inflation will fall, and the short-run trade-off between inflation and unemployment will improve. Employment will recover while low inflation will persist into the future. The lower inflation rate will also reduce the costs, such as shoeleather and menu costs, that are higher at high inflation rates.
You might also like to view...
During most of the United States' involvement in World War II we temporarily operated at point
A. F.
B. G.
C. H.
D. I.
Displayed below is the payoff matrix of firm B for four different strategies, B1, B2, B3, and B4, and the potential retaliatory responses of firm A (A1, A2, A3, A4).Table 12-2 ? B1 B2 B3 B4 A1 100 50 25 200 A2 10 60 150 150 A3 50 75 200 75 A4 70 90 250 15 If firm B uses the maximin criterion, which strategy will it choose? ?
A. B1 B. B2 C. B3 D. B4
Effectively managing aggregate demand in order to stabilize nominal GDP requires
A) policy makers to know the size of the gap between current demand and demand at equilibrium. B) only that policy makers know what level of aggregate demand is necessary for full employment. C) successful economic forecasting. D) that nominal GDP be the same as real GDP. E) very little information about the economy because the market system is an efficient generator of high-quality information.
Assume that in an all-currency economy the real interest rate is 4%, the expected rate of inflation is 8%, and the nominal interest rate is 12%. The monetary base equals $50 billion
The real seignorage revenue collected by the government would equal A) $4 billion. B) $6 billion. C) $8 billion. D) $12 billion.