If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve?
What will be an ideal response?
Adaptive expectations exist when firms and workers expect inflation in the current time period to be the same as inflation in the previous time period. If the Federal Reserve follows an expansionary monetary policy, inflation will rise. If expectations about inflation are adaptive, the expansionary monetary policy will increase actual inflation above expected inflation. With no adjustment in nominal wages, the real wage will fall, and the unemployment rate will be pushed below its natural rate. In other words, the inflation rate and the unemployment rate will be negatively related, as indicated by a short-run Phillips curve.
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Producer surplus is the:
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