Question
'Higher expected inflation in the future will raise inflation today.' Is this true or false? If true, clarify the conditions under which the statement may
'Higher expected inflation in the future will raise inflation today.' Is this true or false? If true, clarify the conditions under which the statement may be true.
For a given nominal interest rate, higher expected inflation will reduce the real interest rate so consumption and investment will increase. If production increases above the natural level, this will lead to wage increases and higher inflation. But if the central bank raises the interest rate sufficiently, demand and inflation need not increase.
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