In congressional testimony, former Federal Reserve Chairman Ben Bernanke said: Another significant factor influencing medium-term trends...

In congressional testimony, former Federal Reserve Chairman Ben Bernanke said:

Another significant factor influencing medium-term trends in inflation is the public’s expectations of inflation. These expectations have an important bearing on whether transitory influences on prices, such as changes in energy costs, become embedded in wage and price decisions and so leave a lasting imprint on the rate of inflation.

What did Bernanke mean when he said that the public’s expectations of inflation could become “embedded in wage and price decisions”? Please verbally and graphically explain using AD/AS analysis.

What would be the effect on the short-run Phillips curve of the public coming to expect a higher rate of inflation? Please verbally and graphically explain using the Phillips curve.

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Expert Solution

Rahul Sunny answered 1 year ago

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