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An economy has a stable unemployment rate and an inflation rate of 2%. Suddenly, both workers and firms come to believe that inflation next year will be 5%. Assuming the bargaining power of workers relative to firms remains unchanged, what is the most likely immediate outcome?
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Introduction to Macroeconomics Course
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Adaptive Expectations Model of Inflation
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An economy has a stable unemployment rate and an inflation rate of 2%. Suddenly, both workers and firms come to believe that inflation next year will be 5%. Assuming the bargaining power of workers relative to firms remains unchanged, what is the most likely immediate outcome?
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A central bank announces a new policy that leads both workers and firms to expect a higher rate of inflation in the coming year. Arrange the following events to illustrate the mechanism through which this change in expectations leads to a higher actual rate of inflation, assuming the unemployment rate does not change.