Rational expectations- inflation unemployment trade-off , Microeconomics

Rational Expectations- Inflation Unemployment Trade-off:

Now, consider what happens if we suppose that workers have rational expectations about the rate of inflation First, this implies that, depends on information available to workers in any period t denoted by I(t), it is possible to define an objective probability distribution for the rate of inflation in the economy in period t + 1. Thus, there exists a conditional probability density function.

The rational expectation hypothesis then implies that 

712_Rational Expectations- Inflation Unemployment Trade-off.png

235_Rational Expectations- Inflation Unemployment Trade-off 1.png

suppose ε(t+1) presents the deviation of the actual rate of inflation

939_Rational Expectations- Inflation Unemployment Trade-off 3.png

Suppose we consider the conditional probability distribution of the prediction error for the rate of inflation in period t+1, ε(t+1),  , given that the set of' information I(t) is available in period t. If, workers do not make systematic errors in prediction, like I consistently predicting a value higher than the actual or a value lower than the actual, 1 then for a sufficiently large number of predictions based on the same information set, the average error in prediction must be zero.

Thus, if workers have rational expectations about the rate of inflation, the expected rate of inflation of workers can never consistently underestimate the actual rate of Inflation. In fact, over the long run, the sum of positive prediction errors for workers 1must be equal to the sum of negative prediction errors.

Posted Date: 11/21/2012 8:18:44 AM | Location : United States







Related Discussions:- Rational expectations- inflation unemployment trade-off , Assignment Help, Ask Question on Rational expectations- inflation unemployment trade-off , Get Answer, Expert's Help, Rational expectations- inflation unemployment trade-off Discussions

Write discussion on Rational expectations- inflation unemployment trade-off
Your posts are moderated
Related Questions
If producers expect future prices to enhance, current supply will decline in favor of selling inventories at higher prices later.  In other words, supply will reduce (a shift to th

what is the south africas governments standpoint on international trade


Since World War II, North Korea has had a centrally planned economy in which the government makes the big decisions on how resources will be allocated. Why would you expect North K


Low levels of productivity: In addition to low standards of living, developing countries are characterized by relatively low levels of labour productivity. Throughout the dev

using demand and supply curves explain how shortage and surplus are created

Consider a hypothetical ABC economy in which the narrowly-defined measure of the  money supply (M1), as defined in the Canadian sense, in existence is 1250$ million. Assuming the e

Will Governments Follow Good Policies? That governments can assist in development and growth doesn't mean that governments will. The broad experience of growth in developing ec

Hydrogen, Alkali and Alkaline earth metals Lithium atom and ion are very small and are comparable in sizes to those of Mg. Their polarizing power (charge / radius) are almost t