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Chapter 28: Problem 11

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 discrepancy in views about inflation between economists and the general public can be attributed to different perspectives and understanding of inflation, more direct impact of inflation on the general public, and possible communication gaps between economists and the general public in conveying the role of inflation in an economy.

Step by step solution

01

Understanding Economists’ Perspective

Economists understand that moderate inflation is a normal part of a healthy economy. So, a small amount of inflation is not just expected, but necessary for economic growth. Notably, inflation is often a sign that an economy is growing. If inflation rates are kept under control, they will not necessarily lead to negative impacts. Thus, economists might not perceive inflation as an immediate threat, unlike drug abuse or the quality of schools deteriorating, which yield urgent and visible societal impacts.
02

Understanding General Public's Perspective

The general public may perceive inflation as a direct threat to their personal economy, given its direct impact on the cost of living. The regular citizen commonly experiences inflation as a decrease in their buying power, meaning they can purchase less with the same amount of money. Looked at from this perspective, inflation’s effects on household budgets could be a key reason why it is seen as a significant problem by the general public.
03

Communication Gap

Lastly, a difference in perception could arise due to a communication gap between economists and the general public. If the information about the role and impact of inflation in an economy doesn't reach the general public effectively or in an understandable manner, misconceptions and fears about inflation could dominate.

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Most popular questions from this chapter

(Related to Solved Problem 28.4 on page 1011 ) Suppose the inflation rate has been 5 percent for the past four years. The unemployment rate is currently at the natural rate of unemployment of 4.5 percent. The Federal Reserve decides that it wants to permanently reduce the inflation rate to 3 percent. How can the Fed use monetary policy to achieve this objective? Be sure to use a Phillips curve graph in your answer.

(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?

Why do workers, firms, banks, and investors in financial markets care about the future rate of inflation? How do they form their expectations of future inflation? Do current conditions in the economy have any effect on how they form their expectations? Briefly explain.

In its 2016 Annual Report, Toll Brothers noted, "If mortgage interest rates increase significantly \(\ldots\) our revenues, gross margins, and net income could be adversely affected." a. Why might an increase in mortgage interest rates reduce revenue and profit for Toll Brothers? b. During this period, was Fed policy attempting to reach a point on the short-run Phillips curve representing higher unemployment and lower inflation or a point representing higher inflation and lower unemployment? Briefly explain. c. What connection is there between Fed policy and Toll Brothers' concern about the effect of rising mortgage interest rates on its profit?

Why did Robert Lucas and Thomas Sargent argue that the Phillips curve might be vertical in the short run? What difference would it make for monetary policy if they were right?
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