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Chapter 28: Problem 11

(Related to the Apply the Concept on page 1000 ) Robert Shiller asked a sample of the general public and a sample of economists the following question: "Do you agree that preventing high inflation is an important national priority, as important as preventing drug abuse or preventing deterioration in the quality of our schools?" Fifty-two percent of the general public, but only 18 percent of economists, fully agreed. Why does the general public believe inflation is a bigger problem than economists do?

Short Answer

Expert verified
The general public tends to perceive inflation as a bigger problem than economists do because of the direct impact it has on their purchasing power, translating to higher living costs. Economists, however, comprehend that controlled inflation can be a part of a healthy, growing economy, and its effects are often distributed over time, making them less noticeable. Their understanding of economic principles also allows them to perceive the larger picture behind inflation.

Step by step solution

01

Understand the Perceptions

Firstly, it is crucial to comprehend that the general public and economists may view inflation from different perspectives. The general public, being the consumers, sees inflation as a decline in the purchasing power of money - this means with the same amount of money, they can buy fewer goods and services. Economists, on the other hand, understand that controlled inflation is a part of a growing economy and is not necessarily all negative.
02

Impact of Inflation on Economists Vs General Public

Economists' primary concern is the overall health and functionality of the economy. Controlled inflation can be a sign of a growing economy and since the impacts of inflation (increase in prices) are distributed over time, and are often not as noticeable in the short term, economists may not perceive inflation as a problem as such. Contrastingly, for the general public, higher inflation can immediately affect their living costs, which may lead them to perceive inflation as a considerable problem.
03

Differences in Understanding Economic Concepts

Economists have a deeper understanding of economic concepts and can see the larger picture better than the general public. They know that while inflation has its downsides, it can also be a sign of a healthy growing economy, or may stimulate economic growth. The public, on the other hand, has a more immediate and direct interaction with inflation, usually experiencing it as a rise in prices of goods and services, which can lead to their perception of inflation as a severe problem.

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Robert Shiller asked a sample of the general public and a sample of economists the following question: "Do you agree that preventing high inflation is an important national priority, as important as preventing drug abuse or preventing deterioration in the quality of our schools?" Fifty-two percent of the general public, but only 18 percent of economists, fully agreed. Why does the general public believe inflation is a bigger problem than economists do?

An article in the Economist stated, "Robert Lucas ... showed how incorporating expectations into macroeconomic models muddled the framework economists prior to the 'rational expectations revolution' thought they saw so clearly." What economic framework did economists change as a result of Lucas's arguments? Do all economists agree with Lucas's main conclusions about whether monetary policy is effective? Briefly explain.
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