The second round increase in inflation following an adverse supply shock is the result of:
A)shifts in potential output.
B)increases in the Federal Reserve's target real interest rate.
C)decreases in the Federal Reserve's target real interest rate.
D)increases in long-term inflationary expectations.

Question

Quizplus · Accepted Answer

The second round increase in inflation is often due to increases in long-term inflationary expectations, as businesses and consumers adjust their behavior in anticipation of continued inflation, leading to a self-fulfilling cycle.

The Second Round Increase in Inflation Following an Adverse Supply