The inflation parable discussed in the text suggests a:
A) short-run relationship between unexpected inflation and output.
B) short-run relationship between expected inflation and output.
C) long-run relationship between unexpected inflation and output.
D) long-run relationship between expected inflation and output.

Question

Quizplus · Accepted Answer

The inflation parable discussed in the text highlights a short-run relationship between unexpected inflation and output. The parable suggests that unexpected increases in inflation lead to a temporary increase in output as firms may mistake the rise in prices for an increase in demand and increase production in response. However, over time, as the true nature of the inflation becomes apparent, firms adjust their output levels accordingly leading to no long-term effects on output. Therefore, choice A) short-run relationship between unexpected inflation and output is the best answer.

The Inflation Parable Discussed in the Text Suggests A