(Solved): This shows flexible inflation targeting in action. The Bank of England was credible in saying that ...

This shows flexible inflation targeting in action. The Bank of England was credible in saying that it would steadily reduce inflabion, as the chart above shows: during 2012-16, UK inflation fell steadily until the Brexit referendum caused a sharp fall in the UK exchange rate and a consequent rise in import prices, The more credible the central bank on inflation control in the medium run, the more it can pursue output stabilisation in the short run without triggering an increase in inflation expectations. Conversely, central banks whose credibility is fragile can take few risks with the level of current inflation in case they set off a darnaging rise in inflation expectations, There is no clearer demonstration of this proposition than the history of Germany's central bank, the Deutsche Bundesbank, before the formation of the euro. The Bundesbank was known to be the most vigorous defender of low inflation in Europe. Yet when crises occurred, the Bundesbank often cut interest rates by more than other central banks. However, a year later, when the crisis was over, the Bundesbank was often the only central bank that had raised interest rates back to their original level again. That is how we would like central banks to behave. Questions 1. Explain why inflation remained low in the UK despite the rise in oil prices as globalisation took place. [10 marks] 2. Explain how the financial crash helped to curb the rise in inflation. [10 marks] 3. With reference to the case study, how successful has the Bank of England been in controlling inflation in the UK? [10 marks] 4. What conclusions can you draw about the current situation in the UK with regards to inflation, monetary and fiscal policy? [10 marks]