The three figures below show the phases of a disinflation.In part (i),the economy is experiencing a sustained inflation at E₁. FIGURE 29-4 Refer to Figure 29-4,part (ii),Phase 2 of the disinflation process.The upward drift of the AS curve will generally continue longer,with rising unemployment and falling output,when

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In phase 2 of the disinflation process, the AS curve will continue to shift upwards, leading to rising unemployment and falling output. This process will continue for a longer time if firms and consumers do not believe that the central bank's disinflation policy is credible. This is because they will not adjust their expectations accordingly, and may continue to hold onto their previous beliefs about inflation and wages, which will make it harder for the economy to adjust to the new lower inflation rate. Therefore, the best choice is E, firms and consumers do not regard the central bank's disinflation policy as credible.

The Three Figures Below Show the Phases of a Disinflation