Setting a target of zero for the inflation rate may be sub-optimal because
A) measured inflation is an overestimate, so zero measured inflation effectively implies deflation
B) the redistributive effects of unexpected inflation are Pareto efficient
C) a stagnant price level precludes the possibility of economic growth
D) deflation encourages investment, so the target rate for inflation should be negative
E) all of the above

Question

Quizplus · Accepted Answer

Setting a target of zero for inflation may be sub-optimal because measured inflation is an overestimate, and a target of zero effectively implies deflation. This can lead to a number of problems, such as discouraging spending and investment, and increasing the real value of debt. Therefore, a small positive inflation rate is often preferable as it allows for price stability and supports economic growth. While unexpected inflation has some redistributive effects, it is not Pareto efficient as it creates winners and losers, and can have negative effects on investment and economic activity. Similarly, while a stagnant price level may limit economic growth to some extent, deflation is generally not desirable as it can lead to a spiral of falling prices and reduced economic activity. Finally, while a negative inflation rate may encourage investment in some cases, it also carries the risk of deflation and the negative effects associated with it.

Setting a Target of Zero for the Inflation Rate May