--%>
Assignment Help - homework help

Would inflation targeting be a good policy

Question:

Why might it be difficult for the Fed to formally adopt inflation targeting?  Would inflation targeting be a good policy for the Fed in the present economic environment?

Answer:

The most important part of the inflation targeting debate is about the optimal level of inflation. While many people believe that it should be in the range of 2%, it is difficult to ascertain the actual optimal level. Again, if the rate is fixed to 2%, then the Fed will have limited scope for a cut back in the interest rates, which might be required periodically to boost investment. Another case in point is that empirical evidence has suggested that US has experienced lowest level of unemployment when the inflation rate was in the range of 3-5%. Another problem is that the inflation targeting itself might not be efficient, asset price and hence the asset market control will also become important if the goals of inflation targeting are to be realized. In the present economic scenario, when the economy needs stimulus, and investment levels are quite low with high level of unemployment, inflation targeting does not seem to be a good policy measure. There is a need for an increase in the aggregate demand, which if materializes, will lead to an increase in inflation. And if inflation targeting is in place, the interest rates will have to be hiked, which will hamper recovery.

 

   Related Questions in Macroeconomics

  • Q : Problem on superior or luxury goods The

    The Income effects will be most strongly positive for: (1) Normal goods. (2) Necessities. (3) Superior or luxury goods. (4) Substitutes and much negative for the complements. Find out the right answer from the above options.

    		•
  • Q : Economic growth model Explain the main

    Explain the main features of Harrod - Domar Growth model. How does the Harrod Domar model explain the occurrence of trade cycles?

    		•
  • Q : Maximizing consumer utility The

    The consumer maximizes the utility whenever spending patterns causes: (i) Total outlays to increase each time prices are altered. (ii) Marginal utilities of each and every good consumed to be equivalent. (iii) Marginal utilities from the last cent spent on each and ev

    		•
  • Q : Competitive market What do you mean by

    What do you mean by the term Competitive market?

    		•
  • Q : Principles of macroeconomics what are

    what are the four factor of economic growth

    		•
  • Q : Unemployment (a) Do you think that

    (a) Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero?

    		•
  • Q : Why businessmen prefer current bank

    Describe why businessmen mostly wish to open current account in bank?

    		•
  • Q : Law of equal marginal advantage The law

    The law of equivalent marginal advantage is violated when people: (1) think about paying a higher price that ensures better quality. (2) elect a general as president while war clouds threaten. (3) fail to allocate similar resources within equally valu

    		•
  • Q : Sources of demand for foreign currency

    State main sources of demand for foreign currency? Answer: The four main sources of demand for foreign currency are as follows: A) To buy services and goods from other countries. B) To send a gift abroad.

  • Q : Purpose of Balance of Payment Meaning:

    Meaning: - as mentioned above, the balance of payments is a periodic accounting of international economic transactions. Each country having regular economic transactions with other countries prepares periodically the final accounts of their foreign receipts and paymen

    		•