An economy tends to overshoot potential GDP in its recovery from recession when expectations depend on last year's inflation in part, because

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B) The reduction in the rate of inflation required to promote recovery is often influenced by the previous year's higher rate of inflation. When expectations are based on last year's inflation, the economy can overshoot its potential GDP as it recovers from a recession because the adjustments in inflation expectations lag behind real-time economic improvements, leading to a temporary overshoot in economic activity.

An Economy Tends to Overshoot Potential GDP in Its Recovery