The most important factor determining how quickly expected inflation adjusts when the government attempts to reduce inflation is
A)the slope of the Phillips curve.
B)the credibility of the government's disinflationary policy.
C)the degree of gradualism in the government's disinflationary policy.
D)the slope of the IS curve.

Question

Quizplus · Accepted Answer

The credibility of the government's disinflationary policy is the most important factor determining how quickly expected inflation adjusts. If the government has a strong reputation for following through on its disinflationary policies, people will adjust their inflation expectations more quickly, leading to a faster reduction in actual inflation. Consequently, a lack of credibility can lead to the persistence of high inflation, despite the government's efforts to reduce it. The other choices may also play a role but are not as significant as the credibility factor.

The Most Important Factor Determining How Quickly Expected Inflation Adjusts