Workers' Disappointment Due to Unmet Real Wage Expectations

Conflicting Claims on Output at Low Unemployment

A country's central bank and government implement policies that successfully keep the unemployment rate at a very low level for several consecutive years. In the first year of this policy, the annual rate of price increases rises from 2% to 5%. If the low unemployment rate is maintained, and assuming that people's expectations about future price increases are based on their recent experience, what is the most likely outcome for the rate of price increases in the following years?

Critique of a Stable Inflation-Unemployment Policy

An economy is experiencing a prolonged period of very low unemployment. According to the economic argument that this situation leads to continuously rising, rather than stable, inflation, place the following events of the wage-price spiral into the correct chronological order as they would repeat over time.

A policymaker claims that a country can permanently maintain a very low unemployment rate by simply accepting a stable, but higher, rate of inflation (for example, 5% per year). This policy is considered sustainable because the relationship between unemployment and inflation is fixed.