Hello, I came across the following question in the Curriculum, but am not sure what is the source of the answer explanation: Central banks would typically be most concerned with costs of: A. low levels of inflation that are anticipated. B. moderate levels of inflation that are anticipated. C. moderate levels of inflation that are not anticipated. The answer is C. Which I understand. However, the explanation states: "C is correct. Low levels of inflation has higher economic costs than moderate levels, all else equal; Unanticipated inflation has greater costs than anticipated inflation" I am not sure where “Low levels of inflation has higher economic costs than moderate levels” came from. Many thanks, Barak
Good question. I am subscribing to this thread.
I have Google it for answers and here is a link that I found: ttp://money.cnn.com/2013/04/19/news/economy/low-inflation-risks/
I hope others can chime in.
Yes. Even I didn’t understand this one. It is part of concept checkers in Schweser.
Find where it says that in the curriculum and report it to be amended / added to the errata.
Reasonably Moderate>Low, and we assume it is positive (it would make sense if it was negative or “deflation”).
I suspect that it’s not an erratum.
Moderate inflation tends to keep the economy moving: there’s incentive to buy today when you know that it’ll cost more tomorrow. Low inflation offers less incentive to keep the economy moving, and makes it more likely to slip into deflation, which can wreak havoc.
I believe that there’s no dispute that unanticipated inflation has greater economic cost than anticipated inflation: forewarned is forearmed, and all that.
mmm that article’s a bit pony, i distrust it because the author couldn’t spell William Baumol’s name right. The context they refer to in the opening is in terms of a symptom of a bad economy, then they list some of the benefits of inflation under the sub “why is low inflation bad?” which is misleading. The reasons listed are good arguments for why we have a POSITIVE inflation target as opposed to a zero inflation target, but not necessarily why it needs to be a higher than “low” (?). Its just another under-informed financial hack responding to continual pressure to produce copy with little in the way of time or resources, so they resort to parroting or copy-paste job.
I suppose that that’s one way to look at it, much as someone might distrust you because you couldn’t spell “phony” correctly.
An alternate way to look at it is that he might not have been talking about William Baumol; he might have been talking about Bernard Baumohl (whose name he spelled correctly).
We’ll probably never know.
Haha agree on Baumohl, what a coincidence.
But i meant pony, as in the little horse, its cockney rhyming slang.
Touché!
(By the way, ponies aren’t really little horses; genetically they’re quite different. Miniature horses, however, are little horses; they’re genetically much more closely related to horses than to ponies. And they’re really cute.
I may not know anything about inflation, but I know a fair bit about horses. Hence, the avatar.)
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it’s because of deflation.
low levels of inflation mean the value of the money is increasing, so people will hold off their purchases for the future and it will slow down the economy