Question

the rate of inflation during the past year was 3%. if firms expect higher demand for their products, you expect inflation during the coming year to be than during the past year because .

Answer 1

If firms expect higher demand, inflation is likely to be higher as businesses may increase prices. High inflation can complicate economic planning and may decrease productivity. Expectation of inflation can itself drive up inflation further.

Step-by-step explanation:

If firms expect higher demand for their products, you expect inflation during the coming year to be higher than during the past year because increased demand often leads to businesses raising prices. The impact of inflation can vary, with slow creeping inflation rates between 0% to 2% generally being manageable for an economy.

However, high inflation rates, such as those witnessed in the 1970s and early 1980s in the U.S., where rates reached 9% to 10%, can lead to complications in economic planning and may decrease productivity. Furthermore, if consumers anticipate higher inflation, it can create a self-fulfilling prophecy, leading to even more inflation as they rush to purchase goods and services promptly before prices go up further.