Question

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? Too little inflation interferes with the downward adjustment of real wages. 0 A 0% inflation target could lead to deflation. O Moderate to high inflation is popular among consumers

Answer 1

Setting an inflation target of 0% means that the prices might fall. This will lead to deflation. Deflation will entail a cut in the nominal wages, higher unemployment, and low economic growth. But deflation also leads to a fall in the government budget deficit, an increase in disposable income, and a favorable time for investment. Therefore, this target is plausible yet controversial. Thus, the correct option is B) 0% inflation target could lead to deflation.