Explain how this arrangement might have influenced New Zealand’s long-run Phillips curve.
Fed Pause Promises Financial Disaster
The indication is that inflationary expectations
have become entrenched and strongly rooted
in world markets. As a result, the risk of global
stagflation has become significant. A drawn-out
inflationary process always precedes stagflation.
Following the attritional effect of inflation, the
economy starts to grow below its potential. It
experiences a persistent output gap, rising unemployment, and increasingly entrenched inflationary expectations.
Source: Asia Times Online , May 20, 2008
Evaluate the claim that if “inflationary expectations” become strongly “entrenched” an economy will experience “a persistent output gap.”