With a \"cold turkey\" disinflationary policy of reducing GDP growth, the assump

Question

With a "cold turkey" disinflationary policy of reducing GDP growth, the assumption of adaptive expectations causes

a temporary recession en route to the final long-run equilibrium.

a permanently lower level of output at the long-run rate of inflation.

inflation to not decrease in the long-run.

an immediate full reduction in inflation with no temporary recession.

Please Explain

a temporary recession en route to the final long-run equilibrium.

a permanently lower level of output at the long-run rate of inflation.

inflation to not decrease in the long-run.

an immediate full reduction in inflation with no temporary recession.

Explanation / Answer

A "cold turkey" disinflationary policy of reducing GDP growth shows the assumption of adaptive expectations causes inflation to not decrease in the long-run. The inflation is caused because of the decrease in the growth rate of GDP. There is a decrease in the prices of goods and services. It also happens due to excessive aggregate demand.

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