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 = 4%.
The natural rate of unemployment = 6%.
Last year's inflation rate = 3%.
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 (3%). Since workers are underestimating the actual rate of inflation, real wages will be declining, leading to an unemployment rate that is below its natural level (4% < 6%). As firms and workers adjust their inflation expectations, real wages will increase until the economy reaches its natural rate of unemployment.
You might also like to view...
Ronald Coase's insight regarding the firm was that
a. firms tend to be more profitable when economies of scale are greater b. uncertainty and information are the keys to perfect competition c. perfectly competitive firms tend to displace monopolies d. economic activity is best understood in terms of the transaction costs of exchange e. consumers often carry out transactions directly with resource suppliers
Refer to the accompanying table. Martha's opportunity cost of making a cake is: Time to Make a PieTime to Make a CakeMartha60 minutes80 minutesJulia50 minutes60 minutes
A. 4/3 of a pie. B. 60 pies. C. 3/4 of a pie. D. 6 pies.