Inflation inertia is the result of the behaviour of ________ and the existence of __________.
A) the central bank;the Bank of Canada's reaction function
B) real and nominal interest rates;an output gap
C) autonomous aggregate demand;the Bank of Canada's policy reaction function
D) inflation expectations;long-term wage and price contracts
E) potential output;automatic stabilizers

Question

Quizplus · Accepted Answer

Inflation inertia is caused by the stickiness of long-term wage and price contracts, which result partly from inflation expectations being incorporated into these contracts. This means that even if inflationary pressures ease, prices and wages may not adjust as quickly as they should because of the existence of these long-term contracts. Therefore, the behaviour of inflation expectations and the existence of long-term wage and price contracts are the main factors that contribute to inflation inertia.

Inflation Inertia Is the Result of the Behaviour of ________