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Unformatted text preview: However, increases in inflation expectations may tend to increase short run output from the demand side, because of the real interest rate effect. The real interest rate is introduced in Chapter 14. b. No. The expectations-augmented Phillips curve implies that maintaining a rate of unemployment below the natural rate requires not merely high inflation but increasing inflation. This is because inflation expectations continue to adjust to actual inflation. 7. a. =1: u u =6%; =2: u u =3% As wages become more flexible, more of the effect of supply shocks (changes in and z ) is transmitted to changes in wages and less to changes in the natural rate of unemployment. b. =1: u u =9%; =2: u u =4.5% In an environment with more wage flexibility (higher ), the natural rate of unemployment rises less in response to an increase in the price of oil. 133...
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- Fall '09