Stable Inflationary Equilibrium in the WS-PS Model
An economy can achieve a stable equilibrium with constant, positive inflation under specific conditions. This occurs when wage and price setters' inflation expectations are met by actual inflation, and aggregate demand is sufficient to maintain unemployment at the supply-side equilibrium level (the intersection of the WS and PS curves). In this state, there is no pressure for the inflation rate to change, as actual inflation equals expected inflation and unemployment is constant.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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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
Learn After
Origins of Increased Inflation from a Stable Equilibrium
Requirement of a Constant Real Exchange Rate for Supply-Side Equilibrium
Long-Run Real Interest Rate and Supply-Side Equilibrium
An economy is in a stable state where unemployment is at its supply-side equilibrium level and the actual inflation rate has been constant at 2% for several years. Suddenly, due to a credible announcement from the central bank, both firms and workers revise their inflation expectations for the upcoming year to 4%. Assuming aggregate demand in the economy remains just sufficient to keep the unemployment rate at its initial equilibrium level, what is the most likely outcome for the actual inflation rate in the next period?
Analyzing Economic Stability
Conditions for Stable Inflation
In an economy experiencing a stable inflationary equilibrium, a persistent positive bargaining gap is necessary to ensure that the actual rate of inflation remains constant and positive.
Match each economic state on the left with its corresponding implication for the bargaining gap and inflation on the right.
An economy is in a state of stable equilibrium with a constant, positive rate of inflation. Arrange the following statements to describe the logical sequence of events that occurs within a single period (e.g., one year) to maintain this equilibrium.
The Mechanics of Stable Inflationary Equilibrium
In an economy at a stable inflationary equilibrium, both nominal wages and prices are rising at the same constant rate. This implies that the ________ wage must be constant, corresponding to the level determined by the intersection of the wage-setting and price-setting curves.
An economy is described as being in a stable inflationary equilibrium. Which of the following statements would be inconsistent with this description?
Evaluating a Policy to Reduce Unemployment