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:...

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 US economy from its

growth path Be specific