ECON 1110 Chapter Notes - Chapter 30: Phillips Curve, Output Gap, Disinflation

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Inflation a rise in the average level of all prices. Usually expressed as the annual percentage change in the consumer price index. The expectation of some specific inflation rate creates pressure for nominal wages to rise by that rate. Rational expectations the theory that people understand how the economy works and learn quickly from their mistakes, so that even though random errors may be made, systematic and persistent errors are not. Change in nominal wages = output-gap effect + expectational effect. The net effect of the two macro forces acting on wages output gaps and inflation expectations determines what happens to the as curve. Actual inflation = output-gap inflation + expected inflation + supply-shock inflation. If inflation and monetary policy have been constant for several years, the expected rate of inflation will tend to equal the actual rate of inflation. In the absence of supply shocks, if expected inflation equals actual inflation, real gdp must be equal to potential gdp.

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