Which statement about inflation targeting is TRUE?
A) Inflation targeting calls for the Federal Reserve to set the growth rate of the money supply equal to the long-term growth rate of the economy.
B) Advocates of inflation targeting believe the economy is inherently stable.
C) If the Fed pursues an inflation target, it increases the money supply when the actual inflation rate is below the target inflation rate.
D) If the Fed pursues an inflation target, it does not change the money supply unless the actual or forecast inflation rate is above the target inflation rate.

Question

Quizplus · Accepted Answer

Inflation targeting involves adjusting the money supply to keep inflation near a predetermined target level. If actual inflation is below the target, the Federal Reserve (or any central bank practicing inflation targeting) would typically increase the money supply to stimulate the economy and push inflation towards the target. This approach is based on the relationship between money supply, economic activity, and inflation.

Which Statement About Inflation Targeting Is TRUE