Question

Which of the following is true of a central bank that employs inflation targeting?

A target rate of annual inflation is maintained by increasing or decreasing tax revenues.

A target rate of annual inflation is maintained by expanding or contracting the money supply.

A target rate of employment is maintained by expanding or contracting the money supply.

A target rate of annual inflation is maintained by hiring or firing federal employees.

Answer 1

b. A target rate of annual inflation is maintained by expanding or contracting the money supply.

Step-by-step explanation:

This is done with the help of various monetary policies issued by the central bank to expand or reduce the money supply in the economy. To increase the rate of inflation, money supply should be increased and vice a versa.

Inflation targeting is the monetary policy goal of most modern central banks. A specific rate of inflation, typically about 2% annually, is targeted, and monetary policy is shaped around the goal. Central banks increase or decrease the supply of money, accordingly, to achieve the inflation target.