Essay: Expectation Augmented Phillips Curve
Expectation Augmented Philips Curve successfully shows that changes in money can only affect real income in the short run and will always be associated with increased inflation. In the long run changes in the quantity of money has negligible effects on real income. The Expectation Augmented Philips Curve is a well respected model and is used extensively in macroeconomic forecasting however it has been criticized by some schools of thought.
The new classical school economists argue that people form rational expectations. People use information efficiently, so they can eliminate systematic mistakes in their predictions (Hoover, n.d.). Some “new Keynesian” economists argue that “there is no natural rate of unemployment in the sense of a rate to which the actual rate tends to return. Instead, when actual unemployment rises and remains high for some time, NAIRU rises as well” (Hoover, n.d.).
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