Why do more flexible wages/prices result in inflation being more responsive to deviations from the natural...

Why do more flexible wages/prices result in inflation being more responsive to deviations from the natural rate of unemployment?

Solutions

Expert Solution

Flexible wages cause the wages to come down when more people are unemployed and supply of labor is higher than the demand of labor. A lower wage translates into the lower price and supply of goods increases. It causes inflation to come down. Though, new job opportunities are created due to increase in production activities. Later on it sets in the demand pull inflation and flexible wages cause the wages to increase. It translates into the increase in price. So, inflation becomes responsive to the unemployment and change in wages of the workers. If there is a change in structural and frictional unemployment, then there is an increase or decrease in the natural rate of unemployment. So, the impact of flexible wages causes the natural unemployment rate to change and it affects inflation. Here, with increase in in the natural rate of unemployment decreases the wage and inflation rate falls and vice versa.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Describe the relationships between inflation levels in prices and inflation levels for prices, wages and interest...

Describe the relationships between inflation levels in prices and inflation levels for prices, wages and interest rates with respect to their ability to affect people's economic status and business outcomes.

Many authors find that wages are more flexible in the US than in Europe: explain why...

Many authors find that wages are more flexible in the US than in Europe: explain why this might be the case.

Describe the relationship between inflation levels in prices and inflation levels, wages and interest rates with...

Describe the relationship between inflation levels in prices and inflation levels, wages and interest rates with respect to their ability to affect people's economic status and business outcomes.

Explain why prices are always flexible.

the higher the anticipated inflation rate, ... a. the more workers will ask for in wages...

the higher the anticipated inflation rate, ... a. the more workers will ask for in wages and the more firms will agree to pay b.the more workers will ask for in wages and the less firms will agree to pay c. the less workers will ask for in wages and the less firms will agree to pay d. the higher the real wage increases offered by firm e. the higher the real wage increases asked for by workers

Explain why it is important that prices are flexible in our economy?

Explain why it is important that prices are flexible in our economy? What are the implications if the government started to control prices for products, how would this influence buying?

Explain why it is important that prices are flexible in our economy?

Explain why it is important that prices are flexible in our economy? What are the implications if the government started to control prices for products, how would this influence buying? add your reference

Explain why it is important that prices are flexible in our economy?

Explain why it is important that prices are flexible in our economy? What are the implications if the government started to control prices for products, how would this influence buying?

Imagine a small open economy with perfectly flexible wages and prices(i.e. classical economy always at full...

Imagine a small open economy with perfectly flexible wages and prices(i.e. classical economy always at full employment) and perfect capital mobility. Say government expenditure, private consumption and taxes are constant but investment demand fluctuates wildy. Do Investment and the real exchange rate co-vary positively or (when one high the other is also high) negatively (one high the other is low)? explain in detail

need all parts answered Business cycle models with flexible wages and prices Suppose the Central bank...

need all parts answered Business cycle models with flexible wages and prices Suppose the Central bank is conducting an expansionary monetary policy, in the new monetarist model by issuing outside money and exchanging it for government bonds on the open market. 1) What are its effects on FLA? Illustrate the equilibrium effects of this on aggregates variables. Does it matter if there is a liquidity trap where excess reserves are held in the financial system? If so why? and if...

Subjects