Chapter 1. Chapter 14 (25)

Step 1

Solved Problems

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

Question

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

Inflation rate = percent increase in nominal wages z0+s3DumOFvnb2IGn24fVQ== (rate of increase in labor productivity) 569CF/b9d8o4b8dZ (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.

Step 2

Question

Suppose that nominal wages increase by 5%, labor productivity increases by 4%, and expected inflation is 3%. What is the actual inflation rate? h4XZagboIgc=%

Inflation rate = percent increase in nominal wages - rate of increase in labor productivity + expected inflation rate. Here, inflation = 5% - 4% + 3% = 4%.

Step 3

Question

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 Nk3ykY2cqVa7HXdZ/MVb/R1ujijLFMwEqFRiS3nsuIHiDYJRqlTd4ke+w3M2dS22KXIKIA==yBhAQ+3VvjM=%.

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.