The short-run costs of disinflation are
A) higher inflation and higher output.
B) higher output and higher inflation.
C) higher output and lower unemployment.
D) lower output and higher unemployment.
E) lower output and lower unemployment.

Question

Quizplus · Accepted Answer

In the short run, disinflation, which means reducing inflation, is likely to cause a reduction in the output and an increase in unemployment. This happens because disinflation often requires tight monetary policy, which means higher interest rates and less money supply, leading to a slowdown in investment and spending in the economy. As a result, businesses may lower production and employment levels. Also, disinflation could reduce the demand for goods and services, contributing to the reduction in output and employment. Therefore, the short-run costs of disinflation are lower output and higher unemployment. Choice D is the correct answer.

The Short-Run Costs of Disinflation Are