Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations
The current unemployment rate = 7%.
The natural rate of unemployment = 5.5%.
Last year's inflation rate = 5%.
This year's inflation rate = 4%.
If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (5%). Since workers are overestimating the actual rate of inflation, real wages will be rising, leading to an unemployment rate that is above its natural level (7% > 5.5 %). As firms and workers adjust their inflation expectations, real wages will decrease until the economy reaches its natural rate of unemployment.
You might also like to view...
We say that a particular life saving method is efficient
a. if it requires very few resources b. if it requires many resources c. if total expenditures on that method are low d. if the cost per life year saved is very high e. if the cost per life year saved is very low
Average total cost is very high when a small amount of output is produced because
a. average variable cost is high. b. average fixed cost is high. c. marginal cost is high. d. marginal product is high.