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Chapter 23: Q 6. (page 617)

Why are central banks so concerned with inflation expectations?

Short Answer

Expert verified

Central banks are worried with inflation expectations because they influence the purchasing behavior of businesses and individuals.

Step by step solution

01

Step 1. Define inflation.

In a market, inflation is defined as a broad, gradual rise in the prices of goods and services. When the general price level rises, each unit of money purchases fewer products and services, resulting in a loss of purchasing power.

02

Step 2. Why are central banks worried about inflation expectations?

Central banks are concerned with inflation expectations because they influence the consumption habits of businesses and individuals, which affects the stability of the economy.

When inflation expectations rise, the short-run aggregate supply curve shifts upward, resulting in higher short-run actual inflation on top of any inflationary effects.

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Most popular questions from this chapter

Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.

“If prices and wages are perfectly flexible, then and changes in aggregate demand have a smaller effect on output.” Is this statement true, false, or uncertain? Explain your answer.

What happens to inflation and output in the short run and the long run when taxes decrease?

What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?

In the aftermath of the financial crisis in the United States, labor mobility has decreased significantly. How, if at all, might this affect the natural rate of unemployment?
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