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The economy currently has an unemployment rate (u) of 6% and inflation rate ( ) of 8%. Furthermore, agents in this economy have rational expectations;
The economy currently has an unemployment rate (u) of 6% and inflation rate ( ) of 8%. Furthermore, agents in this economy have "rational expectations"; they determine e by rationally analyzing all available information and past experiences. Now, the central bank announces that it will do whatever it takes to decrease inflation to 7%. What will happen to u if the central bank has excellent credibility and everyone believes it? What will happen to u if the central bank has no credibility and nobody believes
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