RC: Recession

[chetan86]

Is it possible to decrease inflation without causing a recession and its concomitant increase in unemployment? The orthodox answer is “no.” whether they support the “inertia” theory of inflation (that today’s inflation rate is caused by yesterday’s inflation, the state of the economic cycle, and external influences such as import prices) or the “rational expectations” theory (that inflation is caused by workers’ and employers’ expec- tations, coupled with a lack of credible monetary and fiscal policies), most economists agree that tight monetary and fiscal policies, which cause recessions, are necessary to decelerate inflation. They point out that in the 1980’s, many European countries and the United States conquered high (by these countries’ standards) inflation, but only by applying tight monetary and fiscal policies that sharply increased unemployment. Nevertheless, some governments’ policymakers insist that direct controls on wages and prices, without tight monetary and fiscal policies, can succeed in decreasing inflation. Unfortunately, because this approach fails to deal with the underlying causes of inflation, wage and price controls eventually collapse, the hitherto-repressed inflation resurfaces, and in the meantime, though the policymakers succeed in avoiding a recession, a frozen structure of
relative prices imposes distortions that do damage to the economy’s prospects for long-term growth.


The passage suggests that the high inflation in the United States and many European countries in the 1980’s differed from inflation elsewhere in which of the following ways?
A) It fit the rational expectations theory of inflation but not the inertia theory of inflation.
B) It was possible to control without causing a recession.
C) It was easier to control in those countries by applying tight monetary and fiscal policies than it would have been elsewhere.
D) It was not caused by workers’ and employers’ expectations.
E) It would not necessarily be considered high elsewhere.

Hi,

Can any expert please explain why E is the right answer of above question?

[RonPurewal]

remember how detail-oriented questions work:
• figure out what you need to find
• take an inventory of what the passage actually says about that topic (if you've properly narrowed the issue, you shouldn't have to peruse a ton of text)
• pick a choice that "re-packages" information that's already in your inventory

here, we want to know about inflation in the 1980s in the US and europe versus other countries.

the following is EVERYTHING that the passage has to say about that particular topic:
high (by these countries’ standards) inflation (in which "these countries" = the US and europe)

consider the meaning of that part in parentheses. if it's not clear, just make up real-life examples:
John was short (for a basketball player) --> john wasn't necessarily short by normal standards.
Hiroki was not very heavy (by the standards of sumo wrestlers) --> by the standards of random people, hiroki may have been huge.
etc.
the part in parentheses implies (e) in exactly the same way.

[chetan86]

Thanks a lot for analogies to explain the answer. Now it makes much sense how the answer is derived from the passage. :)

Thanks!!
Chetan

[RonPurewal]

sure.

by the way, you should try to create your own analogies whenever you're uncertain about how an answer choice works.

if you can create these analogies on a regular basis (not necessarily for every problem), then you're thinking about this stuff in the right way.
and, as a bonus, the analogies will prove to you that you don't actually have to learn anything here. you just have to apply thought processes that are already in your head.

[chetan86]

Hi Ron,

Thanks a lot for your advice.
Yeah, I will definitely try as suggested. I am sure it will definitely help me to improve my comprehension.

Thanks!!
Chetan

[jnelson0612]

:-)