Natural Rate Theory
From Dickinson College Wiki
Overview of 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
