Because Deflation Is So Costly, Some Have Argued That Setting

question 111

Essay

Because deflation is so costly, some have argued that setting an inflation target at 2 percent is too low and it should be set higher, to 3 percent, especially in the economic environment of 2007-2010. Consider the impact of such an increase in the inflation target using the AD/AS framework in the short and long runs. Begin your analysis in the long-run equilibrium.

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