Question

Why has canada’s inflation target been set at 2 percent? why 2 percent rather than zero or higher say 4 or 5 percent?

Answer 1

Canada sets it inflation target at 2 percent inorder to lower and the inflation rate and make it stable. This favours the future plans more effectively. Fed varies its rates of interest inorder to make inflation rate at 2%.

• If the inflation rate does not achieve the target rate, then Fed decreases the rates of interests.
• If the inflation rate exceeds the target rate, then Fed increases the rates of interests.

2% is better than zero or higher percents because

• Zero interest rates provides large difficulties or it is worse for those individuals earning a fixed level of income.
• Higher interest rates demoralizes the investment because it increases the cost of borrowing.

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