Question

Explain the three phases of disinflation

Answer 1

Disinflation occurs when the rate of inflation has reduced marginally over the short term. The phases of disinflation are:

Phase-1 Removal of Monetary Validation: The sustained inflation elimination begins with a fall in the monetary expansion rate. The aggregate curve will stops shifting, however ongoing expectations in inflation keep the aggregate supply curve shifting upwards.

Phase 2 Stagflation: Stagflation arises when the inflationary expectations are slow-to-adjust and momentum in wage results to further shifts in the aggregate supply curve.

Phase 3 Recovery: With reverse in expectations the recovery takes output to normal position and the level of price is stabilized by one of two means. Either the recessionary gap results to a decrease in wages or the central bank increases the supply of money thus shifting the aggregate demand