Final answer:
Central bankers around the world believe that fighting inflation should be the primary task of monetary policy. According to the neoclassical model of economics, monetary policy can only lead to low inflation or high inflation.
Step-by-step explanation:
If you were to survey central bankers around the world and ask them what they believe should be the primary task of monetary policy, the most popular answer by far would be fighting inflation.
Most central bankers believe that the neoclassical model of economics accurately represents the economy over the medium to long term.
In the neoclassical model, economists determine the level of potential GDP (and the natural rate of unemployment that exists when the economy is producing at potential GDP) by real economic factors.
If the original level of aggregate demand is AD, then an expansionary monetary policy that shifts aggregate demand to AD₁ only creates an inflationary increase in the price level,
but it does not alter GDP or unemployment. From this perspective, all that monetary policy can do is to lead to low inflation or high inflation—and low inflation provides a better climate for a healthy and growing economy.
After all, low inflation means that businesses making investments can focus on real economic issues, not on figuring out ways to protect themselves from the costs and risks of inflation. In this way, a consistent pattern of low inflation can contribute to long-term growth.