By announcing a higher inflation target,a central bank can
A) permanently increase real GDP and permanently decrease the unemployment rate.
B) temporarily increase real GDP and permanently decrease the unemployment rate.
C) permanently increase real GDP and temporarily decrease the unemployment rate.
D) temporarily increase real GDP and temporarily decrease the unemployment rate.

Question

Quizplus · Accepted Answer

By announcing a higher inflation target, a central bank can temporarily increase real GDP and temporarily decrease the unemployment rate. This is because the expectation of higher inflation can stimulate spending and investment, leading to an increase in aggregate demand and output. However, this effect is only temporary, as the increase in inflation expectations ultimately leads to an increase in nominal wages and prices, reducing the real value of output and returning the economy to its long-run equilibrium level of output and employment. Therefore, while a higher inflation target can provide a short-term boost to the economy, it is not a sustainable solution for achieving long-term growth and stability.

By Announcing a Higher Inflation Target,a Central Bank Can