Inflation Should Be Feared

Economist John H. Cochrane thinks the Fed must be careful not to over-stimulate the economy. He thinks inflation remains a danger because U.S. debt is skyrocketing, with no visible plan to pay it back. For the moment, foreigners are buying that debt. But they are buying out of fear that their governments are worse. They are short-term investors, waiting out the storm, not long-term investors confident that the United States will pay back its debts. If their fear passes, or they decide some other haven is safer, the Fed must watch out. For in that situation, inflation will come with a vengeance. It's not happening yet: Interest rates are low now. But if inflation takes off, it will happen with little warning, the Fed will be powerless to stop it, and it will bring stagnation rather than prosperity.

Explain why the inflation that John Cochrane fears would "bring stagnation rather than prosperity."

It would "bring stagnation rather than prosperity" because _______.

A.

the dollar would fall on the foreign exchange market

B.

inflation always brings stagnation

C.

to lower inflation, the Fed would need to raise interest rates and bring recession

D.

the rate of wage inflation would rise and bring stagflation