Question : The concept of hysteresis suggests that:
Option 1: Temporary shocks can have long-lasting effects on the economy
Option 2: Temporary shocks have no long-lasting effects on the economy
Option 3: Unemployment can never return to its natural rate
Option 4: Inflation can never be permanently reduced
Correct Answer:
Temporary shocks can have long-lasting effects on the economy
Solution : The correct answer is (a) Temporary shocks can have long-lasting effects on the economy.
Hysteresis refers to the idea that the effects of temporary shocks to the economy can persist and have lasting impacts on its long-term performance. It challenges the notion that the economy will automatically revert to its previous equilibrium state after a temporary shock.
The concept of hysteresis highlights the importance of proactive policy measures and timely interventions to mitigate the negative long-term effects of temporary economic shocks and prevent persistent deviations from the long-term equilibrium.
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