With a "cold turkey" disinflationary policy of reducing GDP growth,the assumption of adaptive expectations causes
A)inflation to not decrease in the long-run.
B)an immediate full reduction in inflation with no temporary recession.
C)a temporary recession en route to the final long-run equilibrium.
D)a permanently lower level of output at the long-run rate of inflation.

Question

Quizplus · Accepted Answer

With adaptive expectations, it is assumed that people adjust their expectations of inflation based on past experiences. Therefore, if a cold turkey disinflationary policy is implemented, it will cause a temporary recession as firms and households adjust their expectations and behavior accordingly. In the long-run, the reduction in inflation will be achieved, but not without a short term contraction in output.

With a "Cold Turkey" Disinflationary Policy of Reducing GDP Growth,the