ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The reasons usually given for not targeting an inflation rate closer to zero focus on three issues: (i) problems caused by the constraint that interest rates cannot fall below zero; (ii) difficulties in measuring inflation accurately; and (iii) downward wage rigidities that could affect labour market adjustment.

Detailed explanation-2: -To keep inflation low and stable, the Government sets us an inflation target of 2%. This helps everyone plan for the future. If inflation is too high or it moves around a lot, it’s hard for businesses to set the right prices and for people to plan their spending.

Detailed explanation-3: -Erodes Purchasing Power An overall rise in prices over time reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption. Consumers lose purchasing power whether inflation is running at 2% or at 4%; they just lose it twice as fast at the higher rate.

Detailed explanation-4: -The Federal Reserve targets an inflation rate of 2 percent, in part to stave off deflation in the event of an economic downturn. Maintaining a healthy level of inflation could also give the central bank additional room to lower interest rates when it wants to stimulate the economy.