The Problem for a Central Bank Setting a Zero Inflation

question 72

Multiple Choice

The problem for a central bank setting a zero inflation policy would be:

• A) the risk of high employment.
• B) it is impossible to have zero inflation.
• C) firms would have to cut the nominal wage to reduce the real wage.
• D) economic growth would also have to be zero.

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Definitions:

Efficient Output Level

The quantity of goods or services produced where the marginal cost of production equals the marginal revenue received, leading to optimal allocation of resources.

Units

Standard quantities used to specify measurements and quantify the magnitude of physical quantities.

Perfect Competition

A market structure characterized by a large number of small firms, homogenous products, perfect information, and no barriers to entry or exit, leading to price-taking behavior.

Demand Curves

Graphical representations showing the relationship between the price of a good or service and the quantity of that good or service that consumers are willing and able to purchase at different prices.