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

• A. It focuses exclusively on maximizing employment, regardless of inflation levels.
• B. It does not communicate its policy objectives to the public.
• C. It sets monetary policy with the primary goal of keeping inflation near a publicly announced target rate.
• D. It pegs its currency to another country's currency to control inflation.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of inflation targeting. Inflation targeting is a monetary policy strategy where the central bank sets an explicit target for the inflation rate and uses monetary policy tools to achieve that target.
2. Step 2: Recognize the primary goal of a central bank using inflation targeting. The main objective is to keep inflation near a publicly announced target rate, which helps stabilize prices and anchor inflation expectations.
3. Step 3: Analyze the incorrect options: focusing exclusively on maximizing employment ignores inflation control; not communicating policy objectives contradicts transparency principles of inflation targeting; pegging currency to another country's currency is a different strategy called a fixed exchange rate regime.
4. Step 4: Conclude that the true statement about a central bank employing inflation targeting is that it sets monetary policy with the primary goal of keeping inflation near a publicly announced target rate.
5. Step 5: Remember that inflation targeting involves clear communication with the public to manage expectations and enhance the effectiveness of monetary policy.