Many central banks have established formal targets for the rate of inflation because of the following fundamental observations about economic relationships: 1.there are high costs associated with inflation
2.high inflation causes high unemployment
3.monetary policy is the cause of sustained inflation

Question

Quizplus · Accepted Answer

The first observation is true as high inflation can lead to lower purchasing power of money, uncertainty, and other related costs. The second observation is partially true as high inflation can lead to high unemployment in the short run but not in the long run. The third observation is true as it is the primary responsibility of central banks to control inflation through monetary policy. Therefore, the best choice is D, which includes the first and third observations.

Many Central Banks Have Established Formal Targets for the Rate