Consider an economy without any supply shocks.If the expected inflation rate is 3% and the actual inflation rate is also 3%,then it is probably true that

Question

Quizplus · Accepted Answer

In an economy without any supply shocks, if the expected inflation rate and the actual inflation rate are the same (i.e., 3%), it indicates that the economy is in long-run equilibrium, and the level of output (real GDP) is equal to its potential level (i.e., there is no output gap). This is because in the long run, prices adjust to changes in the money supply or aggregate demand, and there is no systematic upward or downward pressure on prices (i.e., no supply shocks) that can cause the actual inflation rate to deviate from the expected rate. Therefore, the correct answer is A).

Consider an Economy Without Any Supply Shocks