" If the central bank is able to credibly announce that they will maintain the money supply growth rate, so that the increased inflation rate is well anticipated, borrowers,lenders and employers will incorporate the new rate of inflation into long term contracts, so that they will be no adverse effects on the economy" Agree Disagree Why?
Agree. Well anticipated inflation lets every adjust their expectations, people will charge higher prices for goods, ppl will get paid more wages, etc. Its when it is unanticipated that lets say a company has not increased the prices for their goods, but are paying their suppliers more because their suppliers have adjusted. Thats when the layoffs happen to cut costs.
i think i originally put agree, but can now sorta see how the answer should be disagree… the statement “there will be no adverse effects on the economy” is not true… inflation, whether anticipated or not, is still an adverse effect…
i guess since Schweser says Disagree
It’s false, because there are costs associated even with anticipated inflation. For example, grocery stores needing to reprice their merchandise is a cost that will be incurred even if inflation is anticipated (so called “shoe leather” costs, in the economics jargon). The costs are more adverse, however, if inflation is not correctly anticipated.