The Three Figures Below Show the Phases of a Disinflation

question 90

Multiple Choice

The three figures below show the phases of a disinflation.In part (i) ,the economy is experiencing a sustained inflation at E₁. FIGURE 29-4 Refer to Figure 29-4,part (iii) .Consider the recovery phase of the disinflation process.The disadvantage of implementing an expansionary monetary policy to shift equilibrium from E₃ to E₄ is

• A)the likelihood of entering a deflationary phase.
• B)that since expected inflation has been eliminated,real wages will not adjust to any further AD or AS shocks.
• C)a falling price level.
• D)firms and consumers will no longer respond to decreases in interest rates.
• E)the danger of reviving expected inflation,and having to repeat the phases of the disinflation.

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