Macroeconomics 111 - Chapter 15

Macroeconomics 111 - Chapter 15 - CHAPTER 15 Tradeoffs,...

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CHAPTER 15 – Tradeoffs, Expectations, Credibility, and Sources of Business Cycles Phillips Curve – started after a study of the relationship between the unemployment rate and wage in inflation in England -The wage rate rose with falling unemployment – there was an inverse relationship -Consumer price inflation was later substituted for wage inflation -The curve suggests a policy trade-off between unemployment and inflation -AD Increases Unexpectedly – Prices and Output increase unexpectedly – Firms increase hiring and wages rise – Unemployed workers find jobs – unemployment rate falls Adaptive Expectation – an expectation of the future of a variable formed on the basis of the history of that variable\ Rational Expectation – an expectation that is formed on the basis of all available relevant information (on all variables). Also assumes that the public understands the way the economy works – the structure and linkages between variables in the economy. Time Inconsistency
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Macroeconomics 111 - Chapter 15 - CHAPTER 15 Tradeoffs,...

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