Inflation, Disinflation, and Deflation - End of Chapter Problem The economy of Brittania has been suffering from high inflation with an unemployment rate equal to its natural rate. Policymakers would like to disinflate the economy at the lowest economic cost possible. Assume that the state of the economy is not the result of a negative supply shock. How can officials minimize the unemployment cost of disinflation? Is it possible for there to be no cost of disinflation? The government cannot mitigate the cost of disinflation even if the public views its plan to reduce inflation as credible. Expectations about future inflation contribute too little to overall inflation to make a significant difference in the unemployment cost of disinflation. O The government cannot mitigate the cost of disinflation because the public will never view its plan to reduce inflation as fully credible. The government can use contractionary policies to reduce the price level, but any attempts to gain public confidence will be outweighed by the public's knowledge that the government can always resort to printing more money. The unemployment cost of disinflation can be mitigated by government credibility. The more the public believes that the government's policies will reduce inflation, the less unemployment will need to be imposed to adjust public inflationary expectations. Costless disinflation is possible but unlikelyit would only be possible if inflationary expectations shifted immediately after the announcement of the government's plan. There is no unemployment cost of disinflation. Money is neutral with respect to the real economy as long as firms and consumers can adjust to the change in price level