Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 16: Problem 15

The expected inflation rate is 5 percent, and the actual inflation rate is 7 percent. According to Friedman, is the economy in long-run equilibrium? Explain your answer.

Short Answer

Expert verified
No, the economy is not in long-run equilibrium. This is because, according to Friedman, an economy attains long-run equilibrium when the actual inflation rate equals the expected inflation rate. In this scenario, the actual rate of 7 percent is higher than the expected rate of 5 percent, suggesting that the economy is not in a state of long-run equilibrium.

Step by step solution

01

Understanding the Concepts

Friedman's theories are tied to the concept of long-run equilibrium in an economy. An economy is in long-run equilibrium when actual inflation equals expected inflation. In other words, the rate at which prices increase (actual inflation) is the same as what people think it will be (expected inflation). If the actual inflation is different from expected inflation, the economy is said to be out of long-run equilibrium.
02

Examine Given Data

In the situation presented, the expected inflation rate is 5 percent and the actual inflation rate is 7 percent. This indicates that the actual inflation rate is higher than what was expected.
03

Apply Friedman’s Theory

According to Friedman’s theory, for the economy to be in long-run equilibrium, actual inflation must equal expected inflation. But in the given scenario, the actual inflation rate (7 percent) is higher than the expected inflation rate (5 percent). Thus, applying Friedman's theory, it can be concluded that the economy is not in long-run equilibrium.

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

Suppose the government undertakes an expansionary fiscal policy measure that raises aggregate demand but individuals incorrectly anticipate the measure, bias upward. What will the short-and long-run changes be in the price level and Real GDP?

According to Friedman, how do we know when the economy is in long-run equilibrium?

In real business cycle theory, why can't the change in the money supply prompted by a series of events catalyzed by an adverse supply shock be considered the cause of the business cycle?

Assume a current short-run trade-off between inflation and unemployment, as well as a change in technology that permits the wider dispersion of economic policy news. How would the change affect the trade-off? Explain your answer.

"The policy ineffectiveness proposition (connected with new classical theory) does not eliminate policy makers' ability to reduce unemployment through aggregate demand-increasing policies, because they can always increase aggregate demand by more than the public expects." What might be the weak point in this argument?
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