The Firms and Workers in Alpha Form Expectations Adaptively

question 51

Essay

The firms and workers in Alpha form expectations adaptively. The firms and workers in Omega form expectations rationally. Their otherwise identical economies are initially in equilibrium at the natural level of output with 10 percent inflation. The central banks of both Alpha and Omega make credible commitments to reduce the growth rates of money until they achieve 2 percent inflation. Compare and contrast the adjustment process to the new equilibrium at the lower rate of inflation in both countries.

---

Definitions:

Interest Income

Earnings received from deposit accounts or investments that yield interest, such as savings accounts, bonds, or loans.

Accounts Receivable

An asset account that records amounts a company has a right to receive because it has provided goods or services on credit.

Nontrade Receivables

Amounts owed to a company that are not related to the sale of goods or services, such as tax refunds or loans to employees.

Company Officers

Individuals appointed by the board of directors who manage the daily operations of a company, such as the CEO, CFO, and COO.