New Keynesian economists question the credibility of cold turkey disinflation in the real world because
A)the independence of central banks allows them to disregard public opinion.
B)households and businesses do not form their expectations rationally.
C)a reduction in money growth may reduce output and employment substantially in the short run.
D)central banks lack the tools to bring the inflation rate down even in the long run.

Question

Quizplus · Accepted Answer

New Keynesian economists argue that a reduction in money growth may lead to a substantial decrease in output and employment in the short run, which challenges the feasibility of cold turkey disinflation in the real world. They also question the assumption that individuals and businesses form their inflation expectations rationally, which may lead to unexpected and unpredictable consequences when implementing such policies. However, they do not necessarily argue that central banks lack the tools to bring down inflation in the long run or that independence from public opinion is a key issue.

New Keynesian Economists Question the Credibility of Cold Turkey Disinflation