Inflation associated with potential GDP persists at higher levels for longer periods of time
A) the more heavily people weight recent inflation in forming their inflationary expectations.
B) the less sensitive inflation is to the gap between actual and potential GDP.
C) the more sensitive inflation is to the gap between actual and potential GDP.
D) a and b.
E) all of the above.

Question

Quizplus · Accepted Answer

Inflation associated with potential GDP persists at higher levels for longer periods when people heavily weight recent inflation in forming their expectations (A) and when inflation is less sensitive to the gap between actual and potential GDP (B). Both factors contribute to a more entrenched inflationary environment.

Inflation Associated with Potential GDP Persists at Higher Levels for Longer