Which of the following best describes a policy of inflation targeting?
A) It's an inflexible rule that requires the central bank to always achieve a specified inflation rate.
B) It allows monetary policy to focus on inflation and inflation forecasts except in the case of severe recession.
C) It allows the central bank the flexibility of setting different inflation targets each year.
D) It requires central banks to target current inflation rather than inflation forecasts.

Question

Quizplus · Accepted Answer

Inflation targeting is a policy whereby the central bank sets a target rate for inflation and adjusts monetary policy to achieve that target. Option B accurately describes this policy, as it highlights the focus on inflation and forecasts, while still allowing for flexibility in case of severe recession. The other options are not accurate, as inflation targeting is not inflexible (option A), it does not allow for different targets each year (option C), and it often involves targeting inflation forecasts rather than current inflation rates (option D).

Which of the Following Best Describes a Policy of Inflation