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Risk of Rapid Inflation without an Inflation-Targeting Central Bank
An economy is exposed to a greater risk of experiencing rapidly rising inflation if it does not have a central bank committed to an inflation-targeting framework. The absence of a clear mandate and independent authority to prioritize price stability makes the economy more susceptible to inflationary pressures.
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Economics
Economy
Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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Policymaker's Dual Objective Under Inflation Targeting
UK's Adoption of Inflation Targeting in 1992
Common Range and Arbitrary Nature of Inflation Targets
Central Bank's Role in Ensuring Inflation Returns to Target
Argument for Raising Inflation Targets to Mitigate ZLB Risks
Risk of Rapid Inflation without an Inflation-Targeting Central Bank
Risk of High Inflation without an Inflation-Targeting Central Bank
The 2022 Supply Shocks as a Test for Inflation Targeting Policy
Policy Trade-off: Inflation Targeting vs. Exchange Rate Control
Credibility and Stability of an Inflation Target
A central bank has a publicly announced objective to keep the annual increase in consumer prices at 2%. Currently, price levels are rising at exactly this rate. However, a sudden loss of international investor confidence has caused the nation's currency to rapidly lose value on foreign exchange markets. Faced with these two developments, which policy response would be most consistent with the bank's stated framework?
Evaluating Central Bank Policy During an Inflation Shock
Advising a Central Bank on Monetary Policy
Rationale for a Central Bank's Policy Framework
A central bank operating under an inflation targeting framework must prioritize keeping the country's exchange rate stable, even if it means inflation temporarily deviates from its official target.
A central bank has a stated objective of keeping annual inflation at 2%. Current economic reports indicate that the annual inflation rate is 0.5% and the unemployment rate is significantly above its long-run sustainable level. To achieve its objective, which of the following actions is the central bank most likely to implement?
A central bank has successfully maintained an average annual price increase of 2% for the past fifteen years, in line with its publicly stated objective. A sudden, temporary disruption to global supply chains causes the rate of price increases to jump to 6% in the current year. If households and firms believe the central bank will adhere to its long-term objective, how will this belief most likely influence their economic behavior?
Central Bank Policy Flexibility in a Downturn
Evaluating a Proposed Change to a Central Bank's Price Stability Goal
An economy has just emerged from a long period of high and unpredictable price increases. To prevent this from recurring, the government grants the central bank operational independence and publicly announces that the bank's primary objective is to maintain the annual rate of price increase at 2%. What is the most fundamental economic rationale for adopting this specific policy framework?
Figure 5.6: Unemployment, NAIRU, and Inflation in Canada (1985–2022)
Arbitrary Nature of Specific Inflation Targets
Learn After
Central Bank Policy and Inflation Risk
Two economies, Alpha and Beta, face identical, unexpected increases in consumer spending. The central bank in Alpha has a clear, independent mandate to keep price level increases at 2% annually. The central bank in Beta has no such explicit mandate and is often pressured by political leaders to prioritize immediate job growth. Why is Economy Beta at a greater risk of experiencing a sustained period of high price increases following the spending boom?
Evaluating Central Bank Policy Priorities
Explaining Inflation Vulnerability
Match each central bank characteristic with its most likely effect on an economy's vulnerability to rapid and sustained price increases.
A central bank that is legally required to consult with the government's finance ministry before any policy rate change is better equipped to prevent rapid inflation because its actions can be more closely coordinated with the government's overall economic strategy.
When a country's monetary authority lacks a publicly stated, credible commitment to maintaining low and stable price increases, it fails to provide a strong ________ for the public's beliefs about future prices, increasing the likelihood that a temporary price shock could develop into a period of rapid, sustained price hikes.
An economy without a central bank that has a clear, independent mandate to maintain low and stable price increases is hit by a sudden, unexpected surge in consumer demand. Arrange the following events into the most likely sequence that would lead to a period of rapid, sustained inflation.
An economy is experiencing rising unemployment one year before a major election. The government is publicly calling for the central bank to lower interest rates to stimulate job growth. The central bank in this country does not have a legally defined, independent mandate to maintain price stability. If the central bank complies with the government's request, what is the most significant risk to the economy's long-term price stability?
Evaluating Central Bank Responses to an Economic Shock