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Unformatted text preview: Chapter 33 I nflation and the Philips Curve Who win and loses in inflation? o The winners are people who can raise wages or prices and kill their jobs or sell their goods o The losers are people who cant raise their wages or prices or who lose their jobs their wages is too high o Unexpected inflation redistributes income from lenders to borrowers Rational people expect same inflation that is predicted by economists models o Rational expectations - the expectations that economists model predicts o Adaptive expectations expectations based in some way on the past o Extrapolative expectations - expectations that a trend will continue When nominal wages increase by more than growth of productivity, SAS curve shifts up resulting in inflation When nominal wages increase by less than growth of productivity, SAS curve shifts down resulting in deflation Inflation = Nominal wage increase Productivity growth Quantity theory of money and inflation o Inflation is always and everywhere a monetary phenomenon o If money supply rises, price level will rise...
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