Use the information below to explain adjustments that move the economy to a long-run equilibrium. Assume that firms and workers have adaptive expectations
The current unemployment rate = 7%.
The natural rate of unemployment = 5.5%.
Last year's inflation rate = 5%.
This year's inflation rate = 4%.
If firms and workers have adaptive expectations, they will expect inflation this year to be the same as last year (5%). Since workers are overestimating the actual rate of inflation, real wages will be rising, leading to an unemployment rate that is above its natural level (7% > 5.5 %). As firms and workers adjust their inflation expectations, real wages will decrease until the economy reaches its natural rate of unemployment.
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Real interest rates
a. cannot be negative. b. can be negative only if inflation is negative. c. can be negative only if inflation is zero. d. can be negative only if inflation is greater than zero.
Division of labor increases the output of society by
A. ensuring that people are happier in performing their work. B. eliminating scarcity. C. reducing the choices people have to make to a more manageable number. D. allowing resources to specialize in the tasks for which they have a comparative advantage.
If foreign residents buy U.S. Treasury securities to finance the budget deficit, then which of the following will likely occur?
A. a decrease in the trade deficit B. a reduction in the public debt C. there will be a trade balance D. an increase in the trade deficit
In a monopolistically competitive market, the consumer receives the benefit of
A. product differentiation. B. production where price equals marginal cost. C. production at minimum average cost. D. allocative efficiency.