UNEMPLOYMENT AND INFLATION: NATURAL WAGE RATE HYPOTHESIS

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This paper presents a simple macroeconomic model designed to explain both stagnation and stagflation. The money wage rate, fixed in the short run, is assumed to be adjusted over time, so as to realize the natural wage rate, which is determined in each society depending on its economic and social conditions. In the context of this model, stagnation is shown to arise from a decline in the aggregate expenditure, and stagflation from a rise in the natural wage rate relative to labor productivity under alternative hypotheses of price expectations.

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