In the long run, inflation is determined by:
A)inflation expectations.
B)the business cycle.
C)the level of output relative to potential output.
D)the unemployment rate.

Question

Quizplus · Accepted Answer

Inflation expectations play a key role in determining inflation in the long run. If households and businesses expect higher inflation, they may adjust their behavior by demanding higher wages and prices, which can lead to a self-fulfilling cycle of rising inflation. Conversely, if inflation expectations are low, it can help to anchor inflation and keep it under control. While the other factors listed (the business cycle, level of output relative to potential output, and unemployment rate) can all have an impact on inflation in the short run, they do not have the same persistent influence on inflation dynamics as inflation expectations do.

In the Long Run, Inflation Is Determined By