Direct inflation targeting is a monetary policy strategy in which the central bank sets a specific...

 

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Direct inflation targeting is a monetary policy strategy in which the central bank sets a specific inflation target and takes the necessary monetary policy actions to achieve that target. The central bank tries to keep the inflation rate stable for a certain period of time, such as one or two years. New Zealand is one of the countries that introduced a direct inflation targeting strategy. In the early 1990s, New Zealand experienced very high inflation, with inflation rates reaching more than 18% in 1990. To overcome this problem, the Reserve Bank of New Zealand (RBNZ) began implementing direct inflation targeting in 1990. The RBNZ sets an inflation target of 1-3% per year for a period of two years. The central bank uses interest rates as a tool to achieve the inflation target. If the inflation rate rises above the target, the RBNZ will raise interest rates to reduce demand and drive prices down. Conversely, if inflation is low or below target, the RBNZ will lower interest rates to stimulate consumption and investment and push prices up. Based on the case study above, please answer the following questions: a. Please describe and give a brief explanation about the Determination of inflation b. How do countries cope with or manage inflation, especially in the case of New Zealand? c. Why does inflation is very harmful to the economy? Give an explanation with an example of why inflation can affect the economy in terms of real income or economic growth. d. How does demand-pull inflation differ from cost-push inflation? Direct inflation targeting is a monetary policy strategy in which the central bank sets a specific inflation target and takes the necessary monetary policy actions to achieve that target. The central bank tries to keep the inflation rate stable for a certain period of time, such as one or two years. New Zealand is one of the countries that introduced a direct inflation targeting strategy. In the early 1990s, New Zealand experienced very high inflation, with inflation rates reaching more than 18% in 1990. To overcome this problem, the Reserve Bank of New Zealand (RBNZ) began implementing direct inflation targeting in 1990. The RBNZ sets an inflation target of 1-3% per year for a period of two years. The central bank uses interest rates as a tool to achieve the inflation target. If the inflation rate rises above the target, the RBNZ will raise interest rates to reduce demand and drive prices down. Conversely, if inflation is low or below target, the RBNZ will lower interest rates to stimulate consumption and investment and push prices up. Based on the case study above, please answer the following questions: a. Please describe and give a brief explanation about the Determination of inflation b. How do countries cope with or manage inflation, especially in the case of New Zealand? c. Why does inflation is very harmful to the economy? Give an explanation with an example of why inflation can affect the economy in terms of real income or economic growth. d. How does demand-pull inflation differ from cost-push inflation?