All of the following are requirements for reducing inflation without causing a recession except:
A) workers and firms must form expectations rationally.
B) the plan must be announced before expectations are formed.
C) the plan must be believed by workers and firms.
D) the government's budget must be balanced.

Question

Quizplus · Accepted Answer

While a balanced government budget may be desirable, it is not a requirement for reducing inflation without causing a recession. The other three options are essential for successfully reducing inflation without causing a recession. Workers and firms must form rational expectations so that they behave in a way that is consistent with the government's plan to reduce inflation. The plan must be announced before expectations form so that workers and firms have time to adjust their behavior. Finally, the plan must be believed by workers and firms or else they may act in a way that undermines the government's efforts to reduce inflation.

All of the Following Are Requirements for Reducing Inflation Without