Free Practice Question
RC · Reading Comprehension
555-605
Short Passage - Humanities
Reading Passage
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’ expectations, 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.
Which of the following, if true, would most strengthen the author’s conclusion about the use of wage and price controls?
Answer Choices
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Countries that repeatedly use wage and price controls tend to have lower long-term economic growth rates than do other countries.
B
Countries that have extremely high inflation frequently place very stringent controls on wages and prices in an attempt to decrease the inflation.
C
Some countries have found that the use of wage and price controls succeeds in decreasing inflation but also causes a recession.
D
Policymakers who advocate the use of wage and price controls believe that these controls will deal with the underlying causes of inflation.
E
Policymakers who advocate the use of wage and price controls are usually more concerned about long-term economic goals than about short-term economic goals.\n
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Difficulty
555-605
Type
RC
Category