Monday, January 25, 2016

2013 Macroeconomics FRQ #3b (Expected Inflation)

Again, workers recognise that the PL is increasing and demand higher wages. They are able to get higher wages because the economy is overproducing and labor is in high demand. Higher wages cause business to decrease production (SRAS) shifts left. A shifting of the SRAS curve creates a corresponding shifting of the SRPC to the right. In the Long Run the  PL increases and the economy returns to the 6% natural rate of unemployment (NRU).

NIR = RIR + Expected Inflation (Not sure about numbers used, will fix tomorrow as it is late for me)

(Hat tip Ross & Meek)