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 statement that there are high costs associated with inflation (observation 1) is true and supported by economic theory. Observation 2 that high inflation causes high unemployment is also supported by empirical evidence. However, observation 3 that monetary policy is the cause of sustained inflation is not universally true, as monetary policy can also be used to combat inflation. Therefore, choices A and B are incorrect. Finally, choice E is too broad and includes observation 3, which is not entirely accurate. Therefore, the best choice is D, which includes only observations 1 and 3.

Many Central Banks Have Established Formal Targets for the Rate