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Discuss the following statement: "Expected higher inflation causes higher inflation."

Discuss the following statement: "Expected higher inflation causes higher inflation."

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Answer: Lucas was the first economist who gave emphasize on rational expectations. Since, individuaIs are expecting higher rate of inflation given that price level is increasing over the past years, hence they will ask for higher wages for their work. Ultimately, firms will pay higher wages to incentivize its employees to work efficiently. It incurs higher cost of production for the firm. To compensate higher cost, firms will raise price for those products ended up with higher inflation.

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