Inflation expectations play a crucial role in policy effectiveness from "summary" of Principles of Macroeconomics by N. Gregory Mankiw
Inflation expectations are an essential factor in determining the effectiveness of economic policies. When individuals and businesses form expectations about future inflation rates, they adjust their behavior accordingly. For instance, if people expect prices to rise in the future, they may demand higher wages to compensate for the anticipated increase in living costs.
These inflation expectations can have a significant impact on the actual inflation rate in the economy. If consumers and firms believe that prices will continue to rise, they may increase their spending in the present to avoid paying higher prices in the future. This can lead to a self-fulfilling prophecy, where expectations of inflation drive actual inflation higher.
Central banks and policymakers closely monitor inflation expectations when making decisions...
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