A way for policymakers to avoid the problems that deflation can present and still meet their objective of price stability is to:

Question

Quizplus · Accepted Answer

Setting an inflation target of two to three percent allows for some degree of price increases, avoiding the negative effects of deflation, while still maintaining price stability. This is the approach taken by many central banks around the world, including the Federal Reserve in the United States. Setting a target of zero inflation or targeting a nominal interest rate of zero could both lead to problems, as they do not allow for any degree of price flexibility or adjustment. Keeping the monetary base fixed may not be feasible in a dynamic economy, as it could restrict the ability of the central bank to respond to changing economic conditions.

A Way for Policymakers to Avoid the Problems That Deflation