Certified Financial Management Specialist Practice Exam

What is the Federal Reserve’s target average inflation rate?

1. 1%

2. 2%

3. 3%

4. 4%

The correct answer is: 2%

The Federal Reserve's target average inflation rate is 2%. This target is part of the Fed's broader strategy to promote maximum employment and stable prices in the economy. By maintaining a 2% inflation rate, the Federal Reserve aims to create a predictable economic environment that encourages spending and investment. This target is derived from an economic understanding that moderate inflation is conducive to sustained economic growth. The goal is to allow for enough price increases to stimulate consumption without leading to excessive inflation, which could erode purchasing power or lead to an unstable economic environment. The selection of 2% as a target has been a long-standing policy framework for the Federal Reserve, reflecting a commitment to maintaining stable prices while not being overly restrictive on economic growth. This level of inflation is seen as consistent with healthy economic activity, allowing businesses to plan more effectively and consumers to feel confident in their financial decisions.