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Mechanism of Phillips Curve Stability with Anchored Expectations
When inflation expectations are anchored, the Phillips curve remains stable and does not shift upward, even in the face of a shock that temporarily increases inflation. This stability occurs because wage and price setters trust that the central bank will take the necessary actions to return inflation to its target, so they do not adjust their long-term inflation expectations.
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Economics
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Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
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Reduced Cost of Disinflation from Anchored Expectations
Mechanism of Phillips Curve Stability with Anchored Expectations
Reduced Disinflation Cost with Anchored Expectations Despite Policy Delay
Central Bank Credibility and Economic Shocks
An economy experiences a temporary, one-time shock that causes the price of imported goods to rise sharply for a few months. If the public's expectations about long-term price stability are well-anchored, what is the most probable medium-term consequence for the domestic economy after the initial shock subsides?
Economic Response with Anchored vs. Unanchored Expectations
The Strategic Importance of Anchored Inflation Expectations
Learn After
Consider an economy where households and firms have strong confidence in the central bank's commitment to maintaining a low and stable rate of price increases over the long run. If this economy experiences a sudden, temporary increase in global energy costs that pushes up the current inflation rate, what is the most probable effect on the short-run trade-off between inflation and unemployment?
Central Bank Credibility and Inflation Shocks
Expectations and Economic Shocks
In an economy where the public strongly believes the central bank will maintain its long-run inflation target, a temporary negative supply shock (e.g., a sudden oil price spike) will cause a permanent upward shift of the short-run trade-off relationship between inflation and unemployment.