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Question 1 of 3

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You must read each slide, and complete any questions on the slide, in sequence.

Select the appropriate signs to complete the equation for inflation, taking inflationary expectations into account:

Inflation rate = percent increase in nominal wages (rate of increase in labor productivity) (expected inflation rate)

Since all these numbers are in percentages, only addition and subtraction are needed. Productivity lowers inflation (as in a leftward shift of the SRAS curve), while expected inflation leads workers and producers to ask for higher wages and prices.
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Suppose that nominal wages increase by 5%, labor productivity increases by 4%, and expected inflation is 3%. What is the actual inflation rate? %

Inflation rate = percent increase in nominal wages - rate of increase in labor productivity + expected inflation rate. Here, inflation = 5% - 4% + 3% = 4%.
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In the previous step, nominal wages increased by 5%, labor productivity increased by 4%, and expected inflation was 3%, leading to an actual inflation rate of 4%. If expected inflation increases to 5%, actual inflation %.

Inflation rate = percent increase in nominal wages - rate of increase in labor productivity + expected inflation rate. Here, inflation = 5% - 4% + 5% = 6%. In general, increased inflation expectations increase actual inflation.
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