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Quiz - Chapter 29 (Notes from Peggy)

Quiz - Chapter 29 (Notes from Peggy) - accepted theory of...

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Hi all, Some of this week's quiz questions require thinking through the concepts and interpreting effects so the answers require critical thinking rather than finding the answer in the book. I'll help a little with a pretty tricky concept--the relationship between expected inflation, actual inflation and unemployment: First, expected inflation is an important determinant of future inflation. For instance, if the public expects higher inflation, workers demand higher wages, prompting employers to raise the price of their goods, which can results in higher actual inflation. Now, these the expected vs. actual inflation questions are based on the augmented Phillips curve, a pretty widely
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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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