The hypothesis of inflation-unemployment trade-off, Microeconomics

Assignment Help:

The Hypothesis of Inflation-Unemployment Trade-off:

This hypothesis about formation of expectations is therefore known as the hypothesis of adaptive expectations. The hypothesis implies that if the actual rate of inflation is always greater than the expected rate, then the expected rate would be rising overtime. Therefore, in order to maintain a constant rate of unemployment lower than the natural rate, the actual rate of inflation must be rising overtime. Otherwise, the difference between the expected real wage rate of workers and the actual real wage rate (expected by firms) would be falling in the economy.

1859_The Hypothesis of Inflation-Unemployment Trade-off.png

Since ω'/ω> 1, the coefficient of Φe(t) in the above first-order difference equation is greater than one and the constant term on the right hand side is positive.

The stable relation between inflation and unemployment suggested by the Phillips curve is therefore illusory. The same rate of unemployment, if lower than the natural rate, would be associated with increasing rates of inflation over time. Similarly, it can be shown that a rate of unemployment greater than the natural rate; must, in the above case be associated with an increasing rate of deflation over time. The only rate of unemployment which can be maintained in the long run with a constant rate of inflation is the natural rate, where the actual rate of inflation is equal to the rate historically expected by workers. Thus, it follows that there exists no policy trade-off between inflation and unemployment in the sense that a permanently lower rate of unemployment can be established through policy at the expense of a permanent but fixed increase in Rational Expectations and the rate of inflation in the economy. 

 

 

 

 


Related Discussions:- The hypothesis of inflation-unemployment trade-off

Describe the different views on development, Problem 1: (a) Explain the...

Problem 1: (a) Explain the common set of problems that developing countries usually face. (b) In your opinion, which of the problems described in part (a), are more signifi

Seaports and airports - transport infrastructure, Seaports and Airports: ...

Seaports and Airports: Seaports India has 12 major ports and about 185 minor ports over its coastline spread over 7,000 kms. Major ports are managed by the Central Government

Market structure, how do oligopolistic market and monopolistic competition ...

how do oligopolistic market and monopolistic competition react to change in demand and supply ?

The Keynesian model, using the basic Keynesian model answewr the following ...

using the basic Keynesian model answewr the following parts carefully using the relevant diagrams. what happens to the equilibrium level of GDP(Y) given the following: a) a reducti

Returns to scale, describe returns to scale and give examples of each.

describe returns to scale and give examples of each.

Monopsony, what are the advantages of monopsony?

what are the advantages of monopsony?

What is meant by the identification problem, 1. What is simultaneous biases...

1. What is simultaneous biases? Discuss the cause of ednoginity in regression analysis. 2. Explains concisely what is meant by ' the identification problem'' in the context of l

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd