Ask Question
16 April, 22:16

The economy is initially at the natural rate of unemployment, which is 5%, when the authorities decide to bring the unemployment rate down to 3% and hold it there forever. With theta equal to zero, this will yield a 6 % rate of inflation every year. Now suppose that in year (tplus 6), theta changes to 1. theta might increase in this way because

+3
Answers (1)
  1. 16 April, 22:19
    0
    theta might increase in this way because inflation expectations adapt to persistently positive inflation.

    Explanation:

    Since every year inflation rate is 6%, rather then expected inflation according to formula, 3%

    Thus inflationary expectations should incorporate the higher inflation rate, so adaptive expectations follow:

    In year t + 6 : 10%

    t + 7 : 14%

    t + 8 : 18%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “The economy is initially at the natural rate of unemployment, which is 5%, when the authorities decide to bring the unemployment rate down ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers