[Related to the Economics in Practice on p. 258] A monthly survey conducted by Torcuato Di Tella University in Buenos Aires showed that in August 2010, people in Argentina expected inflation to increase 25 percent over the next 12 months, a similar response to the previous month’s survey. This shows a large discrepancy between inflation expectations and the Argentine Central Bank’s monthly index of consumer prices which showed prices rising at an annual rate of 11.2 percent, the highest level in 4 years. Use aggregate supply and demand curves to show the effect of these expectations of inflation on the Argentine economy, assuming firms increase prices in response to the expectations. What can the Argentine Central Bank do to try to lower the expectations to their projected inflation level of 11.2 percent? What impact would this have on the aggregate supply and demand curves?

Source: “Twelve months inflation expectations in Argentina steady at 25%,”

MercoPress, August 20, 2010.