00:01
Suppose workers and firms suddenly believe that inflation will be high, quite high over the coming year, right? suppose also that the economy begins in long run equilibrium and the aggregate demand curves doesn't shift.
00:13
Now the first question says what will happen to nominal wages and what will happen to real wages.
00:19
So we need to know that when the workers and firm revise the expectations in favor of a higher inflation rates in future, then the nominal wage rise.
00:28
So we can say that when workers and firms revise their expectations in favor of a higher inflation rate so basically when they are in favor of a higher inflation rate then we can see that nominal wages rise so therefore however the impact of the real wages right will be different because the real wages would depend on the difference between the nominal wage and the expected inflation rate so we can say that so the real wage the real wages depends on the difference between the nominal wages and the expected inflation rates, right? so, if the increase in nominal wage is greater than the increase in the expected inflation rates then we can say that the real wage would increase, but if the increase in nominal wage is less than the increase in expected inflation rates, their real wages to decrease.
02:11
So if the increase in nominal wage is greater than the increase in the expected inflation rates, then we can see that the real wages will increase and vice versa.
02:51
So therefore the conclusion that we can say is nominal wages.
03:05
Will surely rise but the impact of the real wage is ambiguous the impact of real wages is ambiguous because it depends on the expected inflation rates and the nominal wages so moving on to the second question the second question was using using an aggregate demand of aggravated supply diagram should be effects of the changing expectations on both the short run and long run levels of prices and output so we're going to be join a curve basically diagram basically so first of all if the workers believe that the prices rise in future so if you know that prices arise in future you want more today because they don't want to buy at the high price right so if workers believe that prices will rise in the future then demand will be more today and obviously less in the future so as a result aggregate demand will rise due to the inflation expectations in the short run so you can say that aggregate demand rise due to inflation expectation in the short run on the other hand if the firms believe that the prices rise in future this is workers if the firms believe that the price rise in future then they will supply less today because if they know that price rise they want to gain more it's a company obviously so they will supply less today so they can obviously supply more when the prices rise so if firms believe that prices will rise in future they will supply less today as a result of the less supply aggregate supply will fall in the short run and then in the long run aggregate demand will continue to rise and aggregate supply will continue to fall until the full employment equilibrium is restored at higher price so in the long run aggregate the will rise, continue to rise, aggregate supply will continue to fall until full employment equilibrium is restored and restored what at the higher price.
06:49
So as part the question, i'm drawing the aggregate demand a supply call and and this should look like this...
