Friedman's Argument: How Adaptive Expectations Fuel Accelerating Inflation
Milton Friedman argued that sustained low unemployment leads to continuously accelerating, not just high, inflation. The mechanism relies on adaptive expectations, where workers and firms form their inflation expectations based on the previous year's inflation rate (e.g., ). When a persistent bargaining gap causes inflation, people revise their expectations upward to this new, higher rate. This revised expectation is then factored into the next round of wage and price setting, pushing inflation even higher. This creates a wage-price spiral fueled by constantly rising inflation expectations.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
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