Reference no: EM131549240

1. Central banks around the world view stable and low inflation as a very important goal.

U.S. Federal Reserve System (Links to an external site.)

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"Monetary policy has two basic goals: to promote "maximum" sustainable output and employment and to promote 'stable' prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act." (Links to an external site.)

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NOTE: On January 25, 2012, the Federal Open Market Committee issued a "Statement of Longer-Term Goals and Policy Strategy." (Links to an external site.)

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 One of the important points announced in the statement was a 2 percent numerical inflation target for the overall personal consumption expenditures price index. Key points from the statement are:

- A commitment to the Fed's "statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates."

- A numerical longer-run goal for the personal consumption expenditure price index (PCE PI) of 2 percent.

- An estimate of the longer-run normal rate of unemployment in the 5.2 to 6.0 percent range.

(Source: Federal Reserve Bank of San Francisco)

Why do you think price stability is such an important macroeconomic goal? Discuss the consequences of inflation.