Question

Consider an economy described by the IS-LM-PC model, and suppose that agents in it have unanchored inflation expectations. Finally, assume that the economy begins at the medium run equilibrium with a positive medium run rate of inflation.

Invariably, a drop in consumer confidence in this economy will produce the following immediate outcome.

Select one:

a. Inflation acceleration;

b. A decrease in potential output;

c. Deflation;

d. Disinflation;

Answer 1

SOLUTION :

Consider an economy described by the IS-LM-PC model, and suppose that agents in it have unanchored inflation expectations. Finally, assume that the economy begins at the medium run equilibrium with a positive medium run rate of inflation.

Invariably, a drop in consumer confidence in this economy will produce the following immediate outcome.

In the IS - LM model if consumer confidence are decline than lead to savings desire are strong and it's also lead investment activity fast than economy goes down on "deflationary" condition .

Hence an other's options are incorrect and option "C" is correct explaination of this question.