IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history
Policymakers in 2021-22 debated whether the inflation surge was 'transitory'. Suppose a central bank observes that inflation is driven mainly by a one-off global shipping cost shock, while wage growth and medium-term inflation expectations remain anchored near target. Which policy stance is most consistent with the argument that tight monetary policy is least needed in this case?
Looking through the shock is most consistent. A one-off supply cost increase with anchored wages and expectations produces no second-round effects, so inflation should fade by itself, and tightening would sacrifice output unnecessarily.
- ALook through the shock, because without second-round effects the price rise is a temporary relative price changeCorrect
- BRaise rates sharply, because any price rise needs an immediate response
- CCut rates sharply, because inflation always signals weak demand
- DImpose wage controls, because anchored wages cause inflation
- Devalue the currency, because anchored expectations imply a trade surplus
Explanation
A one-off supply cost shock raises the price level once. If expectations and wages stay anchored, there are no second-round effects, so inflation falls back as the shock fades. Tightening would reduce output at high cost for little gain; the other options misread the situation.
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