Average inflation over the past 20 years has been 3%. You know thatinflation is usually 1% above average at the business cycle peaks and 1%below average during crisis.At the beginning of the year, you don't expect the economy to eitherreach the peak or get into crisis.► Whats is your rational expectation of the inflation rate next year?Imagine there is an unexpected shock that hits the economy in themiddle of the year, and inflation turns out to be 2%. Is yourprevious expectation still rational?► What if you knew at the beginning of the year that crisis is likely tohappen?

In order to forecast future price changes, rational expectations of inflation are established based…

Whats is your rational expectation of the inflation rate next year? Imagine there is an unexpected shock that hits the economy in the middle of the year, and inflation turns out to be 2%. Is your previous expectation still rational? What if you knew at the beginning of the year that crisis is likely to happen?

Whats is your rational expectation of the inflation rate next year? Imagine there is an unexpected shock that hits the economy in the middle of the year, and inflation turns out to be 2%. Is your previous expectation still rational? What if you knew at the beginning of the year that crisis is likely to happen?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter22: Inflation

Section: Chapter Questions

Problem 29CTQ: If, over time, wages and salaries on average rise at least as fast as inflation, why do people worry...

See similar textbooks

Related questions

Q: Why do you think the U.S. experience with inflation over the last 50 years has been so much milder…

A: Inflation refers to a continuous increase in the general price level over a specific time period.…

Q: Q. Discuss the costs and benefits of inflation?

A: Inflation is the rate at which a currency's value falls and, as a result, the general level of costs…

Q: How rising commodity prices and wages might lead to cost-push inflation?

A: Inflation is defined as the rise in the general price of all the goods and services in the economy…

Q: Suppose you borrow $100 from a bank at 5 percent interest for 1 year and the inflation rate that…

A: If $100 is borrowed from the bank at 5% interest rate for 1 year, then after an year, (100+ 5% of…

Q: Suppose there are 1200 units of money on an island, but money grows by 5.32% per year. Islanders…

A: GDP or gross domestic product is the sum of the value of all end commodities produced within the…

Q: What was the rate of inflation between 2015 and 2016?

A: As given CPI for three years, using 2016 as the base year: 1. 2015: 108 2. 2016: 100 3. 2017: 94…

Q: What has been a typical range of inflation in the U.S. economy in the last decade or so?

A: The inflation refers to the increase in the price level in the economy. The inflation leads to a…

Q: Does the BLS method of assessing inflation imply that consumers actually purchase the same goods and…

A: The consumer price index is an economic instrument used to measure the changes in the price level in…

Question

Average inflation over the past 20 years has been 3%. You know that
inflation is usually 1% above average at the business cycle peaks and 1%
below average during crisis.
At the beginning of the year, you don't expect the economy to either
reach the peak or get into crisis.
► Whats is your rational expectation of the inflation rate next year?
Imagine there is an unexpected shock that hits the economy in the
middle of the year, and inflation turns out to be 2%. Is your
previous expectation still rational?
► What if you knew at the beginning of the year that crisis is likely to
happen?

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Rational expectation of inflation for the next year

VIEW

Step 3: Unexpected shock and its impact on inflation expectations

VIEW

Step 4: Awareness at the beginning of the year about the crisis

VIEW

Solution

VIEW

Step by step

Solved in 5 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=940, year 2=970, year 3=1000, and year 4=1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.
u are considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year Inflation-Plus CD offering 1.5% per year plus the rate of inflation. Which is the safer investment? Can you tell which offers the higher expected return? If you expect the rate of inflation to be 3% over the next year, which is the better investment? Why? If we observe a risk-free nominal interest rate of 5% per year and a risk-free real rate of 1.5% on inflation-indexed bonds, can we infer that the market's expected rate of inflation is 3.5% per year？
Suppose that the nominal interst rate is 7 percent and the real interest rate is 5 percent. Instructions: round your answers to the nearest whole number. What is the inflation premium? (in percentage) Given the level of inflation, how many years would it take for the price level to double?
Suppose two parties agree that the expected inflation rate for the next year is 6 percent. Based on this, they enter into a loan agreement where the nominal interest rate to be charged is 6 percent. If inflation for the year turns out to be 4 percent, who gains and who loses? Instructions: Enter your responses as whole numbers. The ex ante real interest rate is 10 percent. This is what borrowers think they are paying and lenders think they are earning. With the actual inflation of 4 percent, the ex post real interest rate will be percent.
gi i need help for question 8 i don,t understand how to do that and also this question is for macroeconomic
Handwritten solution not required correct answer will get instant upvote.
Que 15: What is inflation targeting?
make a table of values that shows the percentages decreases in buying power for inflation rate in whole numbers from 1% theough 10%
While hyperinflations are always caused by rapid growth in the money supply, they can be intensified by the actions of households and firms trying to protect themselves from inflation by spending money as soon as they receive it. During a hyperinflation, the velocity of money is likely to Use the quantity equation to show how the change in vel Holding the growth rate of real GDP constant, this chang increase remain unchanged decrease ▼inflation image 1
Considering the impacts of expected inflation, how might the purchasing power of consumers be affected in the short term?
Hand written solutions are strictly prohibited
The IS -LM view Please see the attached photo