--%>
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 : Methods that FED can use to make money

    What are the four methods that FED can use to make money? What are the most powerful one and what technique the FED to create a gradual easing of the money supply either created or destroyed most seldom uses?

    		•
  • Q : What are various economic growth

    Economic growth is generally defined as a sustained increase in per capital national output over a long period of time. It implies that for economic growth of a nation, the rate of increase in its total output must be greater than the rate of population growth. It ma

    		•
  • Q : Elasticity of brain power When doubling

    When doubling your viewing of soap operas to 16 hrs per week reasons your IQ score to drop/fall from a mastermind level of 140 to a sluggish 70, your TV elasticity of brain power will be: (i) + 1.0. (ii) zero. (iii) – 1.0. (d) +0.5. (e) -0.5.

    		•
  • Q : Difference between

    Elucidate the differences among the frictional, structural, and cyclical forms of unemployment.

    		•
  • Q : Determine the marginal propensity to

    If disposable income increases from Rs. 1,000 to Rs. 1,100, savings increase by Rs. 30. Determine the marginal propensity to save and marginal propensity to consume?

    		•
  • Q : Illustration of equal marginal advantage

    Can someone please help me in finding out the accurate answer from the following question. Shoppers who shift among checkout lanes until it emerges that all register lines are probable to be equally time-consuming are trying to verify to the law of: (i) Equivalent mar

    		•
  • Q : Signals that guide economic decisions

    In market economies, what are the signals which guide economic decisions?

    		•
  • Q : Price elasticity of demand for DVD games

    In this figure shown below, the price elasticity of demand for DVD games among prices of $30 and $40 is nearest to: (i) 7/6. (ii) 1/2. (iii) 3/7. (iv) 7/3. (v) 1/3.

    Q : Principles of macroeconomics Explain

    Explain the concept of “economies of scale” and “increasing returns”.

    		•
  • Q : Fiscal deficit in government budget

    What does fiscal deficit in government budget mean? Answer: This means more borrowing on the portion of government.

    		•