Question

Recall that in the previous chapter the equation for wage determination took the form: and that the equation for price determination took the form P=(1 + m) w Given these equations, what do you know about the relationship between the expected price and the price? A decrease in the expected price will result in The inflation equation: Vin prices. a decrease no change an increase is derived from the price equation: P=Pe (1 +m) (1-ccu + z) Given what you found above, you can see that expected inflation can impact actual inflation through its effects on O A. nominal wages, W. ? B. the unemployment rate, u. OC. the markup, m. OD, outside factors, z

Answer 1

Part 1) A decrease in expected price will result in a decrease in prices.

Part 2) Expected inflation can impact actual inflation through its effects on nominal wages. This is because labour unions do bargaining with the management on the basis of their inflation expectation. So, if the unions expects inflation to rise in the future then they will demand greater pay rise. Increased labour cost will cause firms to raise prices, and inflation spreads in the economy.