Question

Suppose the unemployment rate had been below its medium run level  for a number of periods, but now is back to .

Is it possible for expected inflation to be below actual inflation?

Select one:

a. No, it is not possible;

b. Yes, it is possible if wages are sufficiently sensitive to unemployment;

c. Yes, it is possible if unemployment had stayed below its medium run rate for long enough;

d. Yes, it is possible if expectations are sufficiently unanchored;

Answer 1

1- Anticipated inflation is very rare. In fact actual inflation is different from thr expected one.When the inflation rate is higher or lower than that has been expected it is unanticipated inflation. Most of the time, the rate of inflation is not the one which was anticipated, therefore, it causes problems.

D- Yes, it is possible if expectations are sufficiently unanchored -

1- Well - anchored inflation expectations- Where anchoring refers to both the level and variability of anticipated future inflation- are important for the monetary transmission mechanism and are considered to be a reflection of credible monetary policy.

2-When inflation is higher than expected, the borrower is better off, and the lender is worse off.The opposite effects occur if inflation is lower than expected the borrower loses, and the lender wins.Some loans have interest rates that change with the actual inflation rate.

3- A key factor in predicting inflation is the amount of spare capacity and the rate of economic growth.

4-Expected inflation gets priced into the market without shock, while unexpected inflation acts as a source of volatility to the markets..