inflationary expectations and wage inflation
On July 20, 1993 Alan Greespan, chairperson of the Board of
Governors of the Federal Reserve System, testified before a congressional
committee. He said: “The role of expectations in the inflation process is
crucial. Even expectations not validated by economic fundamentals can
themselves add appreciably to wage and price pressures for a considerable
period, potentially derailling the economy from its growth path.”
(a) If workers are convinced that inflation is about to
increase greatly, what effect does this have on their wage demands? Do their
wage demands fuel further inflation?
(b) If the managers of firms are convinced that inflation is
aobut to increase greatly, what effect does this have on their pricing
decisions? Do their pricing decisions fuel further inflation?
(c) How can inflation derail the economy from its growth
path? Cite cases in the past where inflation derailed the U.S. economy from its
growth path. Be specific.
