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
Problem 1: i) Differentiate between the short and the long run. ii) How is production characterised the short run? Explain the fully using numerical and diagrammatic illustr

Is coca-cola an oligopoly or monopolistic competition

There are two individuals in town, one is high risk and the other is low risk.1 The probabilities of having an accident for the low risk individual and high risk individual are p

1. Explain- a. Tragedy of commons b. Free rider problem c. Diminishing marginal utility d. Diseconomies of scale e. Tax incidence f.  Elasticity g. Gains from

The State of Confidence in Conventional Judgements : While individuals fall back on conventions to guide their behaviour in the face of uncertainty, they are also aware that th

Consumer Behavior: The government considers different calculations to help senior citizens with their increasing heating bills. One proposal on the table is to pay 20% of senio

Axioms: It is possible to construct a utility index which can be used to predict choice in uncertain situations if the consumer conforms to the following five axioms:  • A

Production with Two Variable Inputs *  There is relationship between productivity and production. *  Long run production K& L are variable. *  Isoquants analyze and compa

Suppose a family earns £1,500 per month and can either pay £0.50 per square foot in monthly rent for an apartment in the private rental market, or accept a 1,500 square foot house

Price elasticity of supply: It is the responsiveness of quantity supplied of a commodity to a change in the price of the commodity and measured as percentage change in quantit