Which of the following is likely to lead to a rise in the output cost of disinflation?
When nominal wages and prices adjust slowly, tighter money reduces real spending/output before inflation falls, raising the sacrifice cost. Accurate or promptly rationally…
Choose your answer
Which of the following is likely to lead to a rise in the output cost of disinflation?
Answer and explanation
Correct answer B
When nominal wages and prices adjust slowly, tighter money reduces real spending/output before inflation falls, raising the sacrifice cost. Accurate or promptly rationally adjusting expectations can lower that cost. Gradualism’s effect depends on credibility and contracts, but is not the direct nominal-rigidity mechanism.
Practice for these exams
-
UGC NET Economics