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 a small amount of inflation, which can help prevent deflation, while still maintaining price stability. This is a common approach taken by central banks around the world. Setting a target of zero inflation (choice A) could lead to deflationary pressures, and setting an inflation target well above 5 percent (choice B) could lead to an overheating economy and high inflation. Targeting a nominal interest rate of zero (choice D) is not directly related to preventing deflation and could have other unintended consequences.

A Way for Policymakers to Avoid the Problems That Deflation