if actual inflation is higher than expected inflation, the This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you 13e.4 Expected inflation and the Phillips Curve. How the short run Phillips curve might shift. Following along are instructions in the video below:
“Link between expected inflation and the phillips curve we start with the aggregate demand aggregate aggregate supply model. Which looks like demand short run aggregate supply long run and the s here. The natural level. Which means unemployment is also at natural ebb level.
Now. The fed will increase the money supply. Which will lower the interest rate. Which will shift 1 the already managed be shifted to the right aggregate demand is going 81.
But what is now happening is like this the people are surprised they were living in this world. At this price level. So this was their expected price level was here that the economy was living with the inflation in the mind at this level. They believe.
This is the expected price level which means wages and other inputs were priced. According to this inflation rate. Now. The fed made it as a surprise.
The increase the money supply and the economy was positively affected by then they got it like i don t know like big stimulus. They are now working much nicer because look we moved along the short ride aggregate supply for example because of the sticky wage theory..
Wages were negotiated based on this level. But the companies are now able to sell at this price level right. So actual inflation is higher than expected inflation. Which is very good for the economy.
Which makes unemployment rate lower than the natural unemployment rate is what we see that in the graph we moved from here to here this is inflation. This is unemployment. So we are along this phillips curve. But this phillips curve is valid.
Because expected inflation is lower. So this phillips curve is related to the expectations regarding. Inflation. Now inflation is high people will do what adjust the expectations right.
The workers will say we cannot work any longer at this salary because look inflation is higher my real purchasing power. My purchasing power is smaller. I don t want to work like this i neither increase in my wage. Which will change the expected price level and what will happen now here in my model here.
What will have what will change here. The short run aggregate supply will shift to the left..
Because production factors. Inputs will be more expensive. Why because the people adjusted expected inflation. Which will make unemployment return to the natural level.
What will happen now. I m gonna have another phillips curve here so this is phillips curve. 1. This is phillips curve.
2. What is the difference between this expected inflation here. I had lowered expected inflation is low expected inflation here. I have high expected inflation because the economy adjusted to the new so let s suppose the pizza capricciosa sells for 30 lay right and the cook yeah.
The one that the baker that makes the pizza is earning two thousand plate per month. Neto and now you can sell your capricciosa with 40 lay with prosciutto and your baker is still making. 2000 lay. This is great right now.
The baker is getting angry. Because everything else in the economy is more expensive..
So he will ask for an increase of how much was this thing with 30 increase. So he will also want a 30 increase to his salary. So he will be like how much is this 6 2700. They say late now and if all the others factors of production are adjusted.
If you salt here like 100 you need now in this scenario you d sell 200 because it s very lucrative. But in this scenario. You will go back to 100 because his salaries and the other costs are now increased a lot of course you still have this price for delay or even more expensive because he will say now the fight will begin you ll say 2007. Hi this is not there i want 3000.
And the others say i want more so maybe you will make you even a 42 or 45. But the the real story is that you go back to your initial production let see despite of mozzarella. What is the phone right right if this happens on and on yet they will get used to it they will expect it that this is right so the economy is not set about increase in aggregate demand. They will always like it if you go in zimbabwe.
This case. This will go from 30 late to 300. And this will go then four to three thousand and so on which will bring this inflation cost like shoe leather cars. The people risk say come on why don t we trade pizza in dollars.
So in euros stop using delay because i m getting crazy. Three hundred three thousand let s make it five euros and stayed like this okay..
So this is a shoe leather cause because i get my seller easily and then i have to go to exchange house. Buy euros buy pizza and so on i go crazy or there will be the menu cars there will be the problems for example if i want to open the new pizza restaurant. I might say it s not a good idea because i always have to adjust prices i always have to adjust salaries and i always have to make some tax evasion. I told you the story with tax evasion in the high inflation time because if you don t do the tax evasion.
You ll lose capital. You ll lose a lot of money. And this is not easy so the investment will not be so high. When inflation is getting really high it s doing something else.
It s getting volatile so low inflation. Is pretty stable if you have it like three will. Be. 31 32.
29. Okay. It s okay. But when it s three hundred percent.
It could be four hundred 100 150 is you know the people ” ..
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