Question

This is a two‑part question. In the first part, label each graph according to the type of inflation it represents. In the second part, choose an answer for the question.

Question 9 of 18 > This is a two-part question. In the first part, label each graph according to the type of inflation it represents. In the sec choose an answer for the question. Price level Price level 2 H 2 about us careers | privacy policy | terms of use | contact us I help

Answer Bank

cost‑push inflation

inflation

demand‑pull inflation

If a low‑level inflation policy is announced, but the central banking authority is not credible, what are the results?

Private agents expect low inflation due to the announcement. Paradoxically, high inflation occurs.

Private agents expect high inflation due to the announcement. As a result, high inflation occurs.

Private agents expect low inflation due to the announcement. As a result, low inflation occurs.

Private agents expect high inflation despite the announcement. However, inflation follows the announced goal despite agents expectations.

Answer 1

Cost push inflation happens when price level rises due to rightward or upward shift of the aggregate supply curve.

The aggregate supply curve is shifting rightward or upward in graph 2.

So,

Graph 2 represents cost-push inflation.

Deman pull inflation happens when price level rises due to rightward shift of the aggregate demand curve.

The aggregate demand curve is shifting rightward in graph 1.

So,

Graph 1 represents demand-pull inflation.

Credibility and independence of the central bank determines the gravity with which the economic agents accept the policy announcement of the central bank.

If central bank is not credible or independent then, in that case, economic agents will not believe the policy announcements of the central bank and vice-versa.

In the given case, a low level inflation policy is announced but the central banking authority is not credible.

Due to this, private agents will not believe the policy announcement of the central bank and will expect a higher inflation.

Hence, the correct answer is the option (2) [Private agents expect high inflation due to the announcement. As a result, high inflation occurs].