The effects of expectations on changes in the price level
When people expect prices to rise, they act in ways that actually cause prices to rise. Inflation expectations can become self-fulfilling — making them a driver of inflation in their own right.
Real World
In 2022–23, UK trade unions including the RMT negotiated above-inflation pay deals because workers expected high inflation to persist — those wage rises then fed directly into firms' costs and sustained further price rises.
Exam Focus
When 'evaluate' questions ask about controlling inflation, argue that anchoring expectations is as important as the policy tool itself — this signals evaluative depth.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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