Suppose the output gap is zero,and policy makers wish to reduce the inflation rate from 10 percent to 5 percent.Which of these policies seems best?
A)contractionary policies to reduce output at least 5 percent below potential output
B)a convincing declaration of the inflation rate target,so that expected inflation falls to 5 percent
C)no policy action;inflation will fall on its own,eventually
D)no policy action;inflation will converge to its long-run rate,regardless of policy
E)price and wage controls to counteract their stickiness

Question

Quizplus · Accepted Answer

Contractionary policies to reduce output could lead to a negative output gap, which could have negative consequences on employment and growth. Price and wage controls could create distortions in the market and reduce incentives for productivity improvements. No policy action might not be effective in lowering the inflation rate promptly. A convincing declaration of the inflation target would help anchor expectations and reduce the need for policy actions and market uncertainty. It would also signal the commitment of policymakers to maintain price stability, which could reduce incentives for wage and price increases.

Suppose the Output Gap Is Zero,and Policy Makers Wish to Reduce