Is it possible to decrease inflation without causing a recession
and its concomitant increase in unemployment? The orthodox answer is "no." whether
they support the "inertia" theory of inflation (that today's inflation rate is caused
by yesterday's inflation, the state of the economic cycle, and external influences
such as import prices) or the "rational expectations" theory (that inflation is
caused by workers' and employers' expectations, coupled with a lack of credible
monetary and fiscal policies), most economists agree that tight monetary and
fiscal policies, which cause recessions, are necessary to decelerate
inflation. They point out that in the 1980's, many European countries and the
United States conquered high (by these countries' standards) inflation, but only
by applying tight monetary and fiscal policies that sharply increased
unemployment. Nevertheless, some governments' policymakers insist that direct
controls on wages and prices, without tight monetary and fiscal policies, can
succeed in decreasing inflation. Unfortunately, because this approach fails to
deal with the underlying causes of inflation, wage and price controls eventually
collapse, the hitherto-repressed inflation resurfaces, and in the meantime,
though the policymakers succeed in avoiding a recession, a frozen structure of
relative prices imposes distortions that do damage to the economy's prospects
for long-term growth.
The passage suggests that the high inflation in the United States and many European countries in the 1980's differed from inflation elsewhere in which of the following ways?
(A)It fit the rational expectations theory of inflation but not the inertia theory of inflation
(B)It was possible to control without causing a recession
(C)It was easier to control in those countries by applying tight monetary and fiscal policies than it would have been elsewhere
(D)It was not caused by workers' and employers' expectations
(E)It would not necessarily be considered high elsewhere
Please provide explanation with your answer.
and its concomitant increase in unemployment? The orthodox answer is "no." whether
they support the "inertia" theory of inflation (that today's inflation rate is caused
by yesterday's inflation, the state of the economic cycle, and external influences
such as import prices) or the "rational expectations" theory (that inflation is
caused by workers' and employers' expectations, coupled with a lack of credible
monetary and fiscal policies), most economists agree that tight monetary and
fiscal policies, which cause recessions, are necessary to decelerate
inflation. They point out that in the 1980's, many European countries and the
United States conquered high (by these countries' standards) inflation, but only
by applying tight monetary and fiscal policies that sharply increased
unemployment. Nevertheless, some governments' policymakers insist that direct
controls on wages and prices, without tight monetary and fiscal policies, can
succeed in decreasing inflation. Unfortunately, because this approach fails to
deal with the underlying causes of inflation, wage and price controls eventually
collapse, the hitherto-repressed inflation resurfaces, and in the meantime,
though the policymakers succeed in avoiding a recession, a frozen structure of
relative prices imposes distortions that do damage to the economy's prospects
for long-term growth.
The passage suggests that the high inflation in the United States and many European countries in the 1980's differed from inflation elsewhere in which of the following ways?
(A)It fit the rational expectations theory of inflation but not the inertia theory of inflation
(B)It was possible to control without causing a recession
(C)It was easier to control in those countries by applying tight monetary and fiscal policies than it would have been elsewhere
(D)It was not caused by workers' and employers' expectations
(E)It would not necessarily be considered high elsewhere
Please provide explanation with your answer.
