Unformatted text preview: accepted theory of how inflation behaves. It states that: inflation = expected inflation + (natural level of unemployment - actual level of unemployment) + supply shocks So using the equation, if expected inflation is below actual inflation, it means that either unemployment is below its natural level (which means that production, or output, is above its natural level), or supply shocks have lifted the level of inflation, or some combination of the two. Thus, if workers and firms expected prices to rise by 2 percent but instead they rise by 3 percent, then employment and production will rise. Hope that helps! Peggy...
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This note was uploaded on 09/13/2011 for the course ECON 206 taught by Professor Parkin during the Spring '11 term at Buena Vista.
- Spring '11