What inflation target is commonly cited for price stability?

What inflation target is commonly cited for price stability?

• A. About 2-3%
• B. About 0-1%
• C. About 5-6%
• D. About 7-8%

Answer: (A)

The main idea is that price stability means keeping inflation predictable and low so people can plan and the economy can grow smoothly. Central banks typically aim for a small, positive inflation rate rather than zero, because a bit of inflation helps adjust wages and prices without needing continuous cuts in prices, and it keeps room to maneuver if the economy slows. The commonly cited target is about 2-3% inflation. This range is seen as low enough to maintain price stability, but high enough to avoid deflation and to keep real interest rates usable for policy. In Australia, the Reserve Bank targets an average inflation rate of 2-3% over time for this reason. The other options are less suitable: inflation near zero or negative increases the risk of deflation and economic uncertainty, while inflation around 5-6% or 7-8% would undermine price stability and erode purchasing power.

The main idea is that price stability means keeping inflation predictable and low so people can plan and the economy can grow smoothly. Central banks typically aim for a small, positive inflation rate rather than zero, because a bit of inflation helps adjust wages and prices without needing continuous cuts in prices, and it keeps room to maneuver if the economy slows.

The commonly cited target is about 2-3% inflation. This range is seen as low enough to maintain price stability, but high enough to avoid deflation and to keep real interest rates usable for policy. In Australia, the Reserve Bank targets an average inflation rate of 2-3% over time for this reason.

The other options are less suitable: inflation near zero or negative increases the risk of deflation and economic uncertainty, while inflation around 5-6% or 7-8% would undermine price stability and erode purchasing power.