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Chapter 20: Q 6. (page 546)

Why are central banks so concerned with inflation expectations?

Short Answer

Expert verified

Central banks are so concerned with inflation expectations as they influence the consumption habits of enterprises and consumers.

Step by step solution

01

Step 1. Define inflation.

Inflation is defined as a broad, gradual increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency purchases fewer products and services; hence, inflation equates to a loss of money's purchasing power.

02

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

Central banks are worried with inflation expectations because they influence the consumption habits of enterprises and consumers, which in turn affects the economy's stability.

When inflation expectations grow, the short-run aggregate supply curve shifts upward, resulting in higher short-run actual inflation in addition to any inflationary impacts that may occur.

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Most popular questions from this chapter

“If prices and wages are perfectly flexible, then γ=0and changes in aggregate demand have a smaller effect on output.” Is this statement true, false, or uncertain? Explain your answer.

Calculate what happens to nominal GDP if velocity remains constant at 4and the money supply increases from \(250billion to\)375 billion.

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