GK
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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1-2%
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2-3%
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3-4%
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4-5%
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Detailed explanation-1: -Generally, central banks have set their target at 2% to 3% annual inflation. Inflation targeting appeared in 1990, when the Bank of New Zealand first deployed it. Today, it is used by most of the world’s central banks.
Detailed explanation-2: -The 2-percent rule was adopted by the Federal Reserve and some of its advanced economy peers largely because of the sense that an economy is far better off with a little inflation than a little deflation. Deflationary pressures, as we saw in the recent housing crisis, can be catastrophic and hard to reverse.
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.