Describe the strategy of inflation targeting. Why have many countries begun to use this strategy instead of targeting money growth? What are the advantages and disadvantages of inflation targeting?

What will be an ideal response?


Under inflation targeting, the central bank announces the inflation rate that it will try to achieve over the next 1 to 4 years. Countries have moved to inflation targeting because money-growth targeting had problems in the 1980s as money demand became unstable. Inflation targeting has the advantage of sidestepping the problem of instability in money demand, of being easier to explain to the public, and of increasing the central bank's accountability to the public. But the major disadvantage of inflation targeting is that the long lags through which inflation responds to monetary policy make it difficult for the central bank to judge what policy actions are needed.

Economics

You might also like to view...

For a person to keep his real income steady at a certain level from one year to the next, his nominal income must

A. stay the same as the price index rises. B. rise as fast as the price index. C. rise if the price index falls. D. fall if the price index rises.

Economics

When an investor buys a corporate bond

A) the face value of the bond is equal to what the investor paid for the bond. B) the investor becomes part owner of the corporation. C) the principal of the bond is a loan to the corporation. D) the interest made on the bond represents the bondholder's limited liability in the company.

Economics

The introduction of the power loom during the Industrial Revolution caused:

A. economic growth. B. the long-run aggregate supply curve to shift to the right. C. an increase in the potential output of the economy. D. All of these are true.

Economics

An important assumption that is made when constructing a demand schedule is that

a. only price and quantity matter in determining demand. b. people always want a certain amount of a product. c. demand is too important to be left to the economists. d. all other determinants of demand are held constant. e. demand has a positive slope.

Economics