In your initial post, choose one of the six debates of macroeconomic policy discussed in the textbook. Explain why this macroeconomic issue is relevant to you. Support your choice with economic concepts you have learned during the course.

I choose "Should the Central Bank Aim for Zero Inflation"

36-4 Should the Central Bank Aim for Zero Inflation? One of the Ten Principles of Economics introduced in Chapter 1, and developed more fully in the chapter on money growth and inflation, is that prices rise when the government prints too much money. Another of the Ten Principles of Economics introduced in Chapter 1, and developed more fully in the preceding chapter, is that society faces a short-run trade-off between inflation and unemployment. Put together, these two principles raise a question for policymakers: How much inflation should the central bank be willing to tolerate? Our next debate is whether zero is the right target for the inflation rate.36-4a Pro: The Central Bank Should Aim for Zero Inflation Inflation confers no benefit on society, but it imposes several real costs. As we have discussed, economists have identified six costs of inflation: . Shoeleather costs associated with reduced money holdings . Menu costs associated with more frequent adjustment of prices . Increased variability of relative prices . Unintended changes in tax liabilities due to non-indexation of the tax code . Confusion and inconvenience resulting from a changing unit of account . Arbitrary redistributions of wealth associated with dollar-denominated debts Some economists argue that these costs are small, at least at moderate rates of inflation, such as the 2 percent inflation experienced in the United States during the first two decades of the 21st century. But other economists claim these costs can be substantial, even during periods of moderate inflation. Moreover, there is no doubt that the public dislikes inflation. When inflation heats up, opinion polls identify inflation as one of the nation's leading problems. The benefits of zero inflation have to be weighed against the costs of achieving it. Reducing inflation usually requires a period of high unemployment and low output, as illustrated by the short-run Phillips curve. But this disinflationary recession is only temporary. Once people come to understandFrilllips curve. But this disinflationary recession is only temporary. Unce people come to understand that policymakers are aiming for zero inflation, expectations of inflation will fall and the short-run trade-off will improve. Because expectations adjust, there is no trade-off between inflation and unemployment in the long run. Reducing inflation is, therefore, a policy with temporary costs and permanent benefits. Once the disinflationary recession is over the benefits of zero inflation persist into the future. If policymakers are farsighted, they should be willing to incur the temporary costs for the permanent benefits. This was precisely the calculation made by Paul Volcker in the early 1980s, when he tightened monetary policy and reduced inflation from about 10 percent in 1980 to about 4 percent in 1983. Although in 1982 unemployment reached its highest level since the Great Depression, the economy eventually recovered from the recession, leaving a legacy of low inflation. Today, Volcker is considered a hero among central bankers. Moreover, the costs of reducing inflation need not be as large as some economists claim. If the Fed announces a credible commitment to zero inflation, it can directly influence expectations of inflation. Such a change in expectations can improve the short-run trade-off between inflation and unemployment, allowing the economy to reach lower inflation at a reduced cost. The key to this strategy is credibility: People must believe that the Fed is actually going to carry through on its announced policy. Congress could help in this regard by passing legislation that makes price stability the Fed's primary goal. Such a law would decrease the cost of achieving zero inflation without reducing any of the resulting benefits.One advantage of a zero-inflation target is that zero provides a more natural focal point for policymakers than any other number. In recent years, the Fed has pursued an inflation target of 2 percent, and inflation has remained reasonably close to that target. But will the Fed continue to stick to that 2 percent target? If events inadvertently pushed inflation up to 3 or 4 percent, why wouldn't the Fed just raise the target? There is, after all, nothing special about the number 2. By contrast, zero is the only number for the inflation rate at which the Fed can claim that it has achieved price stability and fully eliminated the costs of inflation.36-4b Con: The Central Bank Should Not Aim for Zero Inflation Price stability may be desirable, but the additional benefits of having zero inflation rather than having moderate inflation are small, whereas the costs of reaching zero inflation are large. Estimates of the sacrifice ratio suggest that reducing inflation by 1 percentage point requires giving up about 5 percent of one year's output. Reducing inflation from, say, 4 percent to zero requires a loss of 20 percent of a year's output. People might dislike inflation of 4 percent, but it is not at all clear that they would (or should) be willing to pay 20 percent of a year's income to get rid of it. The social costs of disinflation are even larger than this 20 percent figure suggests, for the lost income is not spread equitably over the population. When the economy goes into recession, all incomes do not fall proportionately. Instead, the fall in aggregate income is concentrated on those workers who lose their jobs. The vulnerable workers are often those with the least skills and experience. Hence, much of the cost of reducing inflation is borne by those who can least afford to pay it. Economists can list several costs of inflation, but there is no professional consensus that these costs are substantial. The shoeleather costs, menu costs, and others that economists have identified do not seem great, at least for moderate rates of inflation. It is true that the public dislikes inflation, but the public may be misled into believing the inflation fallacy-the view that inflation erodes living standards. Economists understand that living standards depend on productivity, not monetary policy. Because inflation in nominal incomes goes hand in hand with inflation in prices, reducinginflation would not cause real incomes to rise more rapidly. Moreover, policymakers can reduce many of the costs of inflation without actually reducing inflation. They can eliminate the problems associated with the non-indexed tax system by rewriting the tax laws to account for the effects of inflation. They can also reduce the arbitrary redistributions of wealth between creditors and debtors caused by unexpected inflation by issuing indexed government bonds, as the Clinton administration did in 1997. Such an act insulates holders of government debt from inflation. In addition, by setting an example, the policy might encourage private borrowers and lenders to write debt contracts indexed for inflation. Reducing inflation might be desirable if it could be done at no cost, as some economists argue is possible. Yet this trick seems hard to carry out in practice. When economies reduce their rate of inflation, they almost always experience a period of high unemployment and low output. It is risky to believe that the central bank could achieve credibility so quickly as to make disinflation painless. Indeed, a disinflationary recession can potentially leave permanent scars on the economy. Firms in all industries reduce their spending on new plants and equipment substantially during recessions, making investment the most volatile component of GDP. Even after the recession is over, the smaller stock of capital reduces productivity, incomes, and living standards below the levels they otherwise would have achieved. In addition, when workers become unemployed in recessions, they lose job skills, permanently reducing their value as workers.A little bit of inflation may even be a good thing. Some economists believe that inflation "greases the wheels" of the labor market. Because workers resist cuts in nominal wages, a fall in real wages is more easily accomplished with a rising price level. Inflation thus makes it easier for real wages to adjust to changes in labor-market conditions. In addition, inflation allows for the possibility of negative real interest rates. Nominal interest rates can never fall below zero, because lenders can always hold on to their money rather than lending it out at a negative return. If inflation is zero, real interest rates can also never be negative. However, if inflation is positive, then a cut in nominal interest rates below the inflation rate produces negative real interest rates. Sometimes the economy may need negative real interest rates to provide sufficient stimulus to aggregate demand-an option ruled out by zero inflation