What is the Right Inflation Rate?

1. Define the following terms used in the reading:
   1. explicit inflation target
   2. hyperinflation
   3. "shoe-leather" costs
   4. financial intermediation
   5. deflation
   6. nominal interest rate
   7. real interest rate
   8. Mundell-Tobin effect

2. Describe the economic problems that are traditionally associated with high inflation.

3. How does the author measure average financial market activity? What relationship does he find between this measure and inflation rates across countries? What explanation does he offer for this finding?

4. What are the usual reasons given for avoiding inflation that is too low?

5. How might low inflation and low nominal interest rates affect the incentives of banks and other financial intermediaries to lend? Why?

6. What relationship does the author find between economic growth and inflation? Do his findings support the claim that inflation can be too low as well as too high?

Source: "What is the Right Inflation Rate?" David E. Altig, Federal Reserve Bank of Cleveland Economic Commentary, September 15, 2003, pp. 1-4.