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Unformatted text preview: neoclassical model, what e/ect will the tax have on business xed investment by these rms? What if these rms face nancing constraints? Question 4 Your textbook suggests that one plausible range for an ination target might be 1 to 3 percent. There are several reasons why most economists believe that an ination target of zero percent, resulting in absolute price stability, might not be optimal. One reason is that some small ination rate might make labor markets work better due to rigid nominal wages. Another reason is that disination (negative ination) can be very dangerous. A third reason is that zero-percent ination prevents central banks from pushing real interest rates below zero, which is something they might want to do in a severe recession. Why does zero-percent ination have this e/ect? 1...
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This note was uploaded on 10/04/2011 for the course ECON 101b taught by Professor Staff during the Spring '08 term at University of California, Berkeley.
- Spring '08