Why did the Full Employment and Balanced Growth Act establish 3 percent inflation as the benchmark rather than zero inflation?
What will be an ideal response?
The goal was set at 3 percent because of unemployment concerns and to allow for quality changes. If the inflation goal is set too low, the government might decrease spending to stay within the limits of the goal, and this would cause unemployment to increase. In this case, some inflation is the cost to keep unemployment from rising. In addition, over time the quality of goods improves and new products are introduced. The CPI measures price changes but not product changes and thus may overstate inflation. The goal of 3 percent allows for these changes.
You might also like to view...
Recent research estimates that the short-run price elasticity of demand for gasoline in the U.S. is -0.3, and the long-run price elasticity of demand is -1.4. What happens if the government increases the federal gasoline tax?
A . Consumer expenditures on gasoline decrease over the short run and long run. B. Consumer expenditures on gasoline increase over the short run and decline over the long run. C. Consumer expenditures on gasoline decline over the short run and increase over the long run. D. Consumer expenditures on gasoline increase over the short run and long run.
Which of the following best describes what W 2 represents in the context of a skill- biased technical change?
a. the new union wage
b. the new equilibrium wage
c. the new efficiency wage
d. the new minimum wage