Question

The inflation rate is 10 percent, and the central bank is considering slowing the rate of money growth to reduce inflation to 5 percent. Economist Lorenzo believes that expectations of inflation change quickly in response to new policies, whereas economist Sam believes that expectations are very sluggish. Economist_____is more likely to favor the proposed change in monetary policy.

Answer 1

Answer:

Lorenzo

Explanation:

Since economist Lorenzo believes that the people's expectations about inflation change very quickly in response to new monetary policies (in this case contractionary monetary policies), he will favor monetary policies that will try to lower inflation to 5%. Since people respond quickly to monetary policies, the associated costs of reducing inflation (cooling down the economy, higher interest rates, etc.) will not be high.

Instead, economists like Sam that believe that the people do not respond quickly to changes in the monetary policy will believe that the cost of reducing inflation through contractionary policies is too high and will hurt the economy too much.