The Importance Of Inflation Targeting
Inflation targeting is when a central bank sets goal inflation rates within their economy. They do this by adjusting things such as loan interest rates or increase the money supply. By mandating inflation rates and keeping it within a certain range (and not allowing it to wildly fluctuate), the investors and the general public alike, within that economy, can experience some degree of certainly. Inflation targeting leads to a more stable economic system.
By stabilizing inflation, we seek to have more stable prices. The downside of a governments central bank being required to keep interest rates within a certain percent (usually between 1-3% per year) is that it limits their ability to rapidly adjust interest rates in response to a financial
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The AE is the total value of all goods and services paid for in the economy. AE is the combination of household consumption (C) , Unplanned Investments (I),Planned Investments (I), Government spending (G) and Net exports (X). It can be illustrated as AE=C+I+G+X. This is one of several ways to calculate GDP.
The Velocity of money is a term to describe how fast money changes hands. Mathematically; the Velocity = the Nominal GDP divided by the total amount of money in circulation (V=Pq/M). It is an observation of how active & vibrant an economy is or how stagnant it is.
When V is high, money is exchanging hands frequently. Often through the paying for labor and purchasing goods and services. When the value of V drops, it can signal a decrease in wages being paid and general commerce within the economy. Less real money is being spent.
There are several values of V since there are different kinds of money such as M0, M1, M2, Etc. For example,“M1” money is physical currency such as paper notes and coins, deposits in bank accounts. Currently in the US, the Federal Reserve puts M1 at V=6.18. We can compare this number to the V=10.67 back in 2008 when money was moving and grooving. This illustrates that money is changing hands much more slowly today than it did in 2008. The FRED has a great interactive graph which you can see by clicking on the below reference
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