Monetary Policy - Monetary Policy and Aggregate demand - inflation targeting

8 important questions on Monetary Policy - Monetary Policy and Aggregate demand - inflation targeting

What do we call it when the central bank announces the inflation rate it is trying to achieve? And what is it used for?

Inflation targeting
set policy in attempt to hit that target

What is inflation targeting based on?

Inflation targeting is based on on forecast of future inflation.

What are the two advantages to inflation targeting?

  • Transparency
  • accountability
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How does accountability make infaltion targetting a good policy?

The central banks success can be judged by seeing how closely the actual inflation rate have matched the inflation target, making central bankers accountable

What are the disadvantages of inflation targeting?

It is too restrictive because there are times when other concerns  like the stability of the financial system-should take priority over achieving any particular inflation rate

What must the central bank do to achieve inflation target?

The central bank (raises or lowers) its target of the overnight interest rate
which in turn influences market interest rate (loan rate) and exchange rates
shifts the AD curve

How long does monetary policy take to work?

Six to eight quarters to full work

What happens to the to future inflation (target) When the demand is too strong?

when the demand is too strong
pushing the economy against it limits
there is risk  of future inflation moving above the percentage target

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