After a prolonged period of high inflation the government of Oceania decides to set a target of 0% inflation going forward. As the new assistant economic minister, you are tasked with critiquing this policy. Which criticism of the 0% inflation target is plausible yet controversial among economists?

Question

Jonathan Farley

Business

18 May, 08:10

After a prolonged period of high inflation the government of Oceania decides to set a target of 0% inflation going forward. As the new assistant economic minister, you are tasked with critiquing this policy. Which criticism of the 0% inflation target is plausible yet controversial among economists?

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Answers (1)

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Tristian Randolph · Answer 1

The rise in unemployment.

Explanation:

The Phillips curve analyzes the relationship between inflation and unemployment, ie the trade-off between these two variables. Thus, rising inflation reduces unemployment, while a monetary policy of reducing inflation increases unemployment. Thus, the criticism would be that a 0% inflation target policy would be sacrificing employment, that is, it would be necessary to reduce growth and increase unemployment to reach very low levels of inflation.