Which of the following scenarios best reflects the meaning of the term 'inflation targeting'?

• A. A central bank announces a specific inflation rate as its primary policy goal and adjusts monetary policy to achieve that rate.
• B. A central bank increases interest rates to reduce unemployment.
• C. A government sets price controls on essential goods to prevent prices from rising.
• D. A government increases taxes to reduce consumer spending and lower inflation.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the term 'inflation targeting' in macroeconomics. Inflation targeting is a monetary policy strategy where a central bank sets a specific inflation rate as its goal and uses tools like interest rates to achieve that target.
2. Step 2: Identify the key elements of inflation targeting: a clear inflation rate target announced publicly, and the central bank adjusting monetary policy instruments to steer inflation toward that target.
3. Step 3: Analyze each scenario to see if it matches these elements. For example, a central bank announcing a specific inflation rate and adjusting policy aligns with inflation targeting.
4. Step 4: Recognize that increasing interest rates to reduce unemployment is not inflation targeting, as it focuses on unemployment rather than inflation control.
5. Step 5: Understand that government actions like setting price controls or increasing taxes are fiscal policies and do not represent inflation targeting, which is a monetary policy framework.