Explain about price inflation, Macroeconomics

Q. Explain about Price Inflation?

The major reason for allowing for non-constant wages in the model is that we then can allow for persistent deflation/inflation. With constant wages, we can't have persistent inflation as real wages would go to zero.

Neutral inflation is stated as a situation where wage inflation is equal to inflation (in prices). With neutral inflation, real wages are constant. Keynesian model doesn't require neutral inflation and real wages may vary over time. Though we can't have an inflation that is always greater than or always smaller than wage inflation as real wages again would go to zero or infinity (remember, growth has been removed so we expect no upward trend in real wages). Though a few adjustments should be made in the models when we have inflation.

Posted Date: 8/16/2013 2:34:53 AM | Location : United States







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