Ever since Milton Friedman"s address to the American Economic Association in 1968 and the ensuing theoretical work by Robert Lucas and others in the 1970s, the rising long-term inflation expectations have inexorably led to higher inflation. 【K1】______This summer the European Central Bank followed through with a rate hike. In the US, the Federal Reserve is nervously eyeing the latest jumps in producer and consumer prices. Evidence of long-term inflation expectations can be gleaned from breakeven inflation rates on index-linked bonds. Surveys of consumers suggest their expectations for inflation have risen as well. For example, the University of Michigan asks Americans where they think inflation will be over the next 5-10 years. Two years ago they said it would be 2. 9 per cent. Earlier this summer the tally spiked to a more worrisome 3. 4 per cent. Soaring prices for energy and food are mostly to blame. However, as Friedman pointed out, inflation is always and everywhere a monetary phenomenon. The central question is not about inflation expectations. Nor is it about commodity prices, however quickly they may be rising. 【K2】______That is where the story gets more complicated. Are monetary conditions easy Is there spare capacity In the US, slack is appearing in the economy, as seen in rising unemployment, now up to 5. 7 per cent. Negative real interest rates suggest monetary conditions are easy. But the Fed"s own surveys suggest that bankers are less willing to lend; consumers less willing to borrow. Low real interest rates are a manifestation of economic and financial malaise, not excessive monetary accommodation. 【K3】______. So, what are we to make of higher inflation expectations in the US and western Europe Investors and households seem to believe energy and food prices will continue to rise. But will other prices and wages automatically follow suit 【K4】______Perhaps that is why consumer confidence has plummeted on both sides of the Atlantic. In short, households may say they expect higher inflation, but there is little they can do about it. The reality is they are experiencing falling real incomes and pinched balance sheets. That is hardly the stuff of overheating. The Friedman-Lucas emphasis on inflation expectations was a model suited to different times. Central bankers no longer try to ramp growth by springing inflation surprises on unwitting workers. Unionization has declined, automatic cost-of-living adjustments are rare, globalization has reduced pricing power for most companies and bargaining power for most workers. Today, advanced economies are confronted with stagnating growth, collapsing housing markets, slowing world trade, stressed financial systems, and weak household balance sheets. This is not the 1970s. 【K5】______We should therefore be skeptical of the case for tighter monetary policies based on models developed in, and better suited for, a bygone era. Choose the following sentences marked A to E to complete the above article. Write your answer on the ANSWER SHEET. A. Altogether, the case for accelerating US inflation looks weak in the face of below-trend growth and stuttering credit conditions B. Broad-based price and wage inflation is unlikely today C. And so, dutifully, central bankers in the US, UK, euro-zone and even in some emerging economies have spoken reproachfully in recent months about signs that inflation expectations are moving up D. Rather, inflation is determined by the interplay between monetary conditions and capacity in the economy to grow without pushing most prices higher E. Stagnating growth and tighter credit conditions suggest the opposite 【K4】