ECB's Target as the Anchor for Member Country Inflation

South Africa's FlexIT Regime and Inflation Target

Formula for Expected Nominal Depreciation Between FlexIT Economies

Economic Adjustment in an Inflation-Targeting Regime

An economy operates with a flexible exchange rate and an independent central bank committed to an inflation target of 3%. Currently, the economy is experiencing an inflation rate of 5% and an unemployment rate of 4%. The long-run supply-side equilibrium unemployment rate is estimated to be 6%. Based on the principles of long-run adjustment in such an economy, what is the expected outcome over time?

In an economy with a flexible exchange rate and an independent central bank focused on a stable inflation target, achieving long-run equilibrium requires the central bank to actively manage policy to ensure both the inflation rate meets its target and the unemployment rate meets a pre-determined target level.

Long-Run Adjustment Path

For each economy described below, which operates with a flexible exchange rate and an inflation-targeting central bank, match its current state to its expected long-run equilibrium.

In an economy operating with a flexible exchange rate and an inflation-targeting central bank, the long-run equilibrium level of unemployment is not determined by monetary policy, but rather by the __________ side of the economy.

An economy with a flexible exchange rate and an inflation-targeting central bank experiences a demand shock that pushes inflation above its long-run target. Arrange the following events to show the logical sequence of the economy's adjustment back to its long-run equilibrium.

The Self-Correcting Mechanism in an Inflation-Targeting Economy

Critique of a Policy Proposal

A political leader in a country with a flexible exchange rate and an independent central bank announces a plan to use monetary policy to permanently reduce the unemployment rate to 2%, which is well below the country's estimated long-run supply-side equilibrium unemployment rate of 5%. The leader also promises that the central bank's inflation target of 3% will be maintained. Why is this dual objective fundamentally problematic in the long run?