The absence of the expected inflation term, p^e, in the price-adjustment equation generally causes A) more overshooting to occur. B) overshooting to be less severe. C) direct convergence to new equilibrium outcomes. D) prolonged unemployment. E) less initial inflation.

Question

Quizplus · Accepted Answer

The absence of the expected inflation term, p^e, in the price-adjustment equation generally causes direct convergence to new equilibrium outcomes. This is because the expected inflation term represents the inflation that is already anticipated by the market, and its absence means that the market is not expecting any further inflation. As a result, the price-adjustment equation will converge to the new equilibrium price more quickly, without any overshooting.

The Absence of the Expected Inflation Term, Pe, in the Price-Adjustment

The Absence of the Expected Inflation Term, P^e, in the Price-Adjustment