An unexpected sharp reduction in inflation will most likely result in
A) the rapid growth of output and employment.
B) a reduction in the actual rate of unemployment.
C) a reduction in the natural rate of unemployment.
D) a temporary increase in unemployment and a decline in real output.

Question

Quizplus · Accepted Answer

An unexpected sharp reduction in inflation, also known as disinflation, can lead to a decline in demand for goods and services as consumers and businesses curtail their spending. This can lead to a temporary decrease in production, which can cause firms to lay off workers and result in an increase in unemployment. The decline in demand can also result in a decline in real output. Therefore, the correct choice is D.

An Unexpected Sharp Reduction in Inflation Will Most Likely Result