Reducing inflation without incurring serious unemployment costs is possible if
A)policymakers are able to reduce the expected inflation rate.
B)people form their expectations based on rational expectations theory.
C)monetary authorities rapidly decrease the money supply.
D)the government makes a significant budget cut.

Question

Quizplus · Accepted Answer

If policymakers are able to reduce the expected inflation rate, people may adjust their behaviors accordingly, and this can lead to lower actual inflation without creating serious unemployment costs. For instance, if people expect that prices will rise by 5% next year, they may push for wage increases of at least 5%, which can fuel inflation. However, if policymakers communicate a credible commitment to reduce inflation, people may revise their expectations and demand lower wage increases, reducing upward inflationary pressures. Rational expectations theory can help explain how people update their inflation expectations in response to policy changes. Option B is not wrong, but it is more a condition for the effectiveness of option A. Options C and D may have unintended consequences on the economy, such as a steep recession, and are not guaranteed to reduce inflation without causing significant unemployment costs.

Reducing Inflation Without Incurring Serious Unemployment Costs Is Possible If