Natural Rate Theory: Difference between revisions
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==Overview on The Natural Rate Theory== | |||
Early Keynesians believed in setting nominal wages and prices respectively and not taking into account inflationary expectations. | |||
Currently new Keynesians take in to account inflationary expectations therefore setting real wages and prices. These policies result in limiting the affect on unemployment and output. | |||
What happens when only relative wages and prices are set by price and wage setters? | |||
If unemployment rate is below natural level of unemployment there will be accelerated. | |||
And vice versa if it is above then there will be accelerated deflation. | |||
The dynamics of inflation. | |||
If unemployment is below the natural rate this will cause… | |||
• Demand for goods and for labor to be high | |||
• Firm decides to charge higher prices than others | |||
• This will cause actual inflation to exceed expected. This gap will cause a further reaction | |||
• Expectations are adjusted upwards and inflation rises higher still. Inflation is ever increasing. | |||
[[The Missing Motivations in Macroeconomics]] | [[The Missing Motivations in Macroeconomics]] | ||
Revision as of 20:52, 25 April 2007
Overview on The Natural Rate Theory
Early Keynesians believed in setting nominal wages and prices respectively and not taking into account inflationary expectations. Currently new Keynesians take in to account inflationary expectations therefore setting real wages and prices. These policies result in limiting the affect on unemployment and output. What happens when only relative wages and prices are set by price and wage setters? If unemployment rate is below natural level of unemployment there will be accelerated. And vice versa if it is above then there will be accelerated deflation.
The dynamics of inflation. If unemployment is below the natural rate this will cause… • Demand for goods and for labor to be high • Firm decides to charge higher prices than others • This will cause actual inflation to exceed expected. This gap will cause a further reaction • Expectations are adjusted upwards and inflation rises higher still. Inflation is ever increasing.
The Missing Motivations in Macroeconomics | Ricardian Equivalence | Dependence of Consumption on Wealth, not Income | The Modigliani-Miller Theorem | Rational Expectations
