The economy is dichotomized in the short-run because of the Taylor rule

Wage-negotiations are subject to money illusion so that real wages would fall to an unsustainable level

Even if we could reduce unemployment to 0% today at a cost of an increase in inflation of 5%, there is no guarantee that underlying inflation in the economy would remain unchanged

The battle of the mark-ups determines wages and prices only so long as there is no supply shock

The OPEC cartel for oil prices collapses due to political disagreements.

Financial crisis results in a freezing of interbank lending

Drought destroys half of a country’s crops

Tax for energy use introduced to help reduce global emissions

that in the long-run the price level is assumed perfectly flexible

that under fixed exchange rates, the money supply is exogenous

.that the marginal propensity to import is assumed to be a constant fraction of GDP

.the principle of long-run PPP

(A) positive domestic inflation; (B) reduces domestic and foreign demand

(A) positive domestic inflation; (B) increases the domestic demand

(A) rising domestic inflation; (B) reduces domestic and foreign demand

(A) rising domestic inflation; (B) increases the domestic demand

Otherwise the real exchange rate would change

The Principle of Purchasing Power Parity would be violated

This is inconsistent with Okun’s Law

Each must equal the domestic rate of inflation so that AS does not shift and the relative competitiveness of domestic goods does not change