CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

If people expect a higher rate of inflation, the SAS will ______ and LAS will ______.
A. decrease; not be affected
B. increase; not be affected
C. not be affected; not be affected (Changes in inflation expectations will impact demand, not supply.)
Explanation: If people expect a higher inflation rate, sellers' incentive to sell at a given price in the current period will be reduced; goods that they do not sell today will be available for sale in the future at what they anticipate will be even higher prices. SAS will decrease. However, this expectation does not have a long-term effect since LAS is determined by technology, resource base, and institutional factors only.

User Contributed Comments 5

User Comment
Joel1980 Hmmm, what say inspected inflation leads to increased prices - still not tempted to sell?
flpe1047 This can also be explained by analyzing wages. With higher expected inflation workers will require higher wages and production will decrease. The same can be viewed through the Phillips Curve. If there is higher than expected inflation there will be unemployment (less workers in production - lower supply).
flpe1047 Forgot to add that in the long run expected inflation equals actual inflation so natural rate of unemployment will not be affeted.
Shaan23 I thought of it in terms of input prices. If input prices are higher(Due to inflation) --- SRAS will decrease.
farhan92 i interpreted this the same way as Shaan
You need to log in first to add your comment.