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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.

In many countries around the world, the population is aging and large segments of the population are retiring or close to retirement. What effect would this have on a country鈥檚 long-run aggregate supply curve? What will happen to aggregate output as a result?

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

Suppose the inflation rate remains relatively constant while output decreases and the unemployment rate increases. Using an aggregate demand and supply graph, show how this scenario is possible.

If the unemployment rate is above the natural rate of unemployment, holding other factors constant, what will happen to inflation and output?
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