Question

Inflation targeting involves

a		a public announcement of medium-term numerical targets for inflation.
b		increased accountability of the central bank for attaining its inflation objectives.
c		an information-inclusive approach in which many variables are used in making decisions about monetary policy.
d		All of these.

Answer 1

The answer for the question given is option '(d) All of these'

Now let us understand why did we go for option (d) as our answer. For that, let us be clear with what inflation targeting is. Inflation Targeting, just as the name suggests, is setting a target inflation rate and taking efforts to achieve the set target. The power to make decisions regarding this lies with the Central Bank. Central bank checks the actual GDP as against the potential GDP. If the actual GDP is more than the potential GDP, it means that there is an upward pressure i.e it indicates the presence of inflation in the economy. The Central bank detemines the medium term inflation target and announces it officially which makes it more accountable for achieving the target, this target helps Central bank to make decisions regarding its monetary policy. If this inflation is much higher than the set target, it will be required to control the inflation. In such circumstances, the central bank will adjust its monetary policy i.e. it will increase the interest rate so that the economy cools down and inflation goes down (high interest rates encourage more savings and investment which result in less demand of currency resulting in its depreciation and therefore economy cools down).

Therefore as we saw above, all options (a), (b) & (c) are appropriate and so we go for option (d) ALL OF THESE.