How Do Expectations of Higher Inflation Become Embedded in the Economy

question 49

Essay

How do expectations of higher inflation become embedded in the economy and affect actual inflation?

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Definitions:

Cognitive Dissonance Theory

A psychological theory suggesting that we experience discomfort or distress from holding two conflicting beliefs, behaviors, or attitudes, leading to a change in one to reduce the dissonance.

Challenging

Presenting difficulties or demanding effort to be undertaken successfully, often leading to personal growth or development.

Rewarding

Providing satisfaction, pleasure, or a positive outcome that reinforces behavior or effort.

Expectations

Beliefs or hopes concerning what is possible or likely to happen in the future.