The three figures below show the phases of a disinflation. In part i), the economy is experiencing a sustained inflation at E 1.
FIGURE 29-4
-Refer to Figure 29-4, part iii). Consider the recovery phase of the disinflation process. The disadvantage of implementing an expansionary monetary policy to shift equilibrium from E3 to E4 is

Question

The three figures below show the phases of a disinflation. In part i), the economy is experiencing a sustained inflation at E 1.
  FIGURE 29-4
-Refer to Figure 29-4, part iii). Consider the recovery phase of the disinflation process. The disadvantage of implementing an expansionary monetary policy to shift equilibrium from E3 to E4 is

Quizplus · Accepted Answer

The danger of implementing an expansionary monetary policy to shift equilibrium from E3 to E4 is reviving expected inflation, which would lead to having to repeat the phases of the disinflation process. This is because the expansionary monetary policy would increase aggregate demand and potentially lead to an increase in the price level, which would revive expectations of inflation. Thus, the best choice is E.

The Three Figures Below Show the Phases of a Disinflation