Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 28: Problem 1

Why do workers, firms, banks, and investors in financial markets care about the future rate of inflation? How do they form their expectations of future inflation? Do current conditions in the economy have any effect on how they form their expectations? Briefly explain.

Short Answer

Expert verified
Workers, firms, banks, and investors care about future inflation rates as it affects their finances, investment returns, lending rates, etc. They form their expectations based on various economic factors, government policies, monetary conditions, and global trends. Current economic conditions do affect these expectations as they alter the flow of economy and thus, influence future inflation. Inflation expectations can be adaptive or rational, depending on the information they are based on.

Step by step solution

01

Understanding the Impact of Inflation on Workers, Firms, Banks, and Investors

Firstly, it is crucial to know that inflation impacts the purchasing power of money. When inflation is high, the value of money decreases, reducing the buying power. Workers, firms, banks, and investors are concerned about future inflation because it affects their financial planning, investment returns, lending rates, and overall economic health.
02

Formation of Inflation Expectations

These entities form their expectations based on various economic indicators, government fiscal and monetary policies, money supply in economy, global economic trends, and prevailing inflation rates. They use these indicators to anticipate the rate of future inflation.
03

Effect of Current Economic Conditions

Yes, current economic conditions greatly impact their expectations. Emergent situations such as recessions, booms, policy changes, global crises etc., have significant implications on the economy and thus, affect their anticipations about future inflation. The anticipation about future inflation can be adaptive (based on past trend) or rational (factoring in all available information).

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

During a time when the inflation rate is increasing each year for a number of years, are adaptive expectations or rational expectations likely to give the more accurate forecasts? Briefly explain.

What actions should the Fed take if it wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation?

(Related to the Apply the Concept on page 1000 ) Robert Shiller asked a sample of the general public and a sample of economists the following question: "Do you agree that preventing high inflation is an important national priority, as important as preventing drug abuse or preventing deterioration in the quality of our schools?" Fifty-two percent of the general public, but only 18 percent of economists, fully agreed. Why does the general public believe inflation is a bigger problem than economists do?

What does it mean to say that workers and firms have rational expectations?

A column in the New York Times in 2017 was titled "The Low-Inflation World May Be Sticking Around Longer Than Expected." Are the low inflation rates of recent years entirely the result of Federal Reserve policy? Could they have occurred without the Fed having a mandate to achieve price stability? Briefly explain.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free