Stable Inflationary Equilibrium in the WS-PS Model

An economy is operating with a stable unemployment rate that corresponds to its long-run equilibrium. At this level, there is no pressure for real wages to either increase or decrease. If both firms and workers throughout this economy come to expect a 2% increase in the general price level over the next year, what is the most likely outcome?

Analyzing a Stable Economy

A stable, positive rate of inflation can only be sustained in an economy if the unemployment rate is kept below its equilibrium level, creating a positive bargaining gap.

Explaining Inflation at Equilibrium

Figure: Labor Market Equilibrium and the Phillips Curve with Positive Expected Inflation