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Running Head: MICROECONOMICS POLICIES
Inflation targeting is an economic policy which is use by central bank of a country to
publicly regulate a target inflation rate. Zero-inflation is a way to keep inflation levels as low as
possible and avoiding its negative effects on an economy. Inflation targeting is an open way to
explain interest rate policy and to anchor people’s expectations about the future inflation. Inflation
target can limit the central bank’s elasticity in responding to economic conditions. However, other
economists argue that inflation is not necessarily attached to any internal factor to a country’s
economy hence struggling to maintain a zero-inflation level is not a variable target (Denes,
Silveira, Beissinger, 2015).
When the inflation level is high, there is a general increase in the prices levels and the cost
of living also goes up. The role of central bank therefore, is to control the circulation of money in
the economy, to issue currency and to regulate the interest rates in a country. The central bank
therefore, holds the mandate to control the inflation of a country. When the inflation rates are high,
the central bank passes the policy of increasing the interest rates and decrease money supply so as
to limit the about of money circulating in the economy. On the other hand, when the inflation rates
fall below the identified range, the central bank lowers the interest rates and raises money supply
in the economy so as to push the inflation up. From this ...