Question

In William Poole's 'Is Inflation Too Low?' what were the three arguments against the notion that inflation prevents dynamic inefficiency and two arguments against the idea that inflation preserves the FED's ability to pursue expansionary policy?

Answer 1

• Low inflation can be a reason of arising economic problems in a country.Lower employment rate or if consumer confidence is low,people will not be ready to make investments.
• The three arguments are:
  • First argument says that, a small rigidity creates larger inefficiency.This may lead to inflation.
  • Second argument makes use of two mechanisms in order to achieve adjustments in worker's wages.Either cut the relative wage or let the price around to rise.
  • The third argument is more transparent.Inflation will increase micro-economic shocks.This is because, an increase in price will create an increase in inflation.