Question:
Why can Inflation being Embedded affect the Philipps Curve?
Author: eric_galvaoAnswer:
-Let's say we begin at Point A, where Unemployment is at its Natural Rate. This is the NRU -Inflation is at 0% here, and Economic Agents will Expect Inflation to stay the same, as it Influences Workers Wage, and Consumers Expenditure -If AD Rises, and Unemployment goes Below the NRU, then Wage Demands will Increase and Inflation will therefore Rise - say 3% -Because Economic Agents think Inflation will stay at 3%, Economic Agents will use that to Influence their Decision-making (Wage Negotiation) -As Wage Demands become Greater, Firms will be Less Willing to take Workers so Unemployment will Rise back to the NRU. Despite Unemployment Returning back, the Inflation Rate of 3% is now Embedded in the economy. Higher AD only leads to Further Embodiments of Inflation in the Economy
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