For an economy to eliminate inflation once people have begun to anticipate it,_____.
A)a passive policy approach must be followed
B)the monetary authorities must announce their decisions
C)actual inflation must be greater than anticipated inflation
D)cold turkey solutions that lead to further inflation must be avoided
E)a recession will have to be endured until expectations have been reduced

Question

Quizplus · Accepted Answer

Once people have begun to anticipate inflation, any policy response that does not reduce expectations is unlikely to be effective. This means that a recession will have to be endured until expectations have been reduced to bring inflation under control. This is because inflation can become a self-fulfilling prophecy, with price-setters raising prices in anticipation of higher future inflation, thereby reinforcing the initial expectation of inflation. A recession will reduce demand and put downward pressure on prices, thus breaking the cycle of inflationary expectations.

For an Economy to Eliminate Inflation Once People Have Begun