Range of Uncertainty in the Price Level & Inflation
Suppose that the Fed is required to keep the inflation rate between 1 percent and 2 percent a year but with no requirement to keep trend inflation at the midpoint of this range. The Fed achieves its target.
a. If initially the price level is 100,
i. find out the highest price level that might occur after 10 years.
ii. find out the lowest price level that might occur after 10 years.
iii. What is the range of uncertainty about the price level after 10 years?
b. Would this type of inflation goal serve the financial markets well and provide an anchor for inflation expectations?