29.3 Reducing Inflation
The three figures below show the phases of a disinflation.In part (i),the economy is experiencing a sustained inflation at E 1 . FIGURE 29-4
-Refer to Figure 29-4,part (ii),Phase 2 of the disinflation process.The upward drift of the AS curve will generally continue longer,with rising unemployment and falling output,when

Question

29.3 Reducing Inflation
The three figures below show the phases of a disinflation.In part (i),the economy is experiencing a sustained inflation at E 1 .  FIGURE 29-4
-Refer to Figure 29-4,part (ii),Phase 2 of the disinflation process.The upward drift of the AS curve will generally continue longer,with rising unemployment and falling output,when

Quizplus · Accepted Answer

In Phase 2 of the disinflation process shown in Figure 29-4, the upward drift of the AS curve will generally continue longer with rising unemployment and falling output when firms and consumers do not regard the central bank's disinflation policy as credible. This lack of credibility can cause them to expect high inflation to continue, leading to stubbornly high inflationary expectations and reduced willingness to adjust their behavior in response to the central bank's attempts to reduce inflation. This can in turn undermine the effectiveness of the disinflation policy, prolonging the period of output and employment losses.

29.3 Reducing Inflation The Three Figures Below Show the Phases of a Disinflation.In