Final Answer:
Ilton Friedman argued that the economy is not in long-run equilibrium if the expected inflation rate equals the actual inflation rate.
Step-by-step explanation:
Ilton Friedman's proposition underscores the significance of expectations in the long-run equilibrium of an economy. In his framework, when the expected inflation rate equals the actual inflation rate, the economy is considered to be in a state of equilibrium. This implies that economic agents, including consumers and businesses, accurately anticipate future inflation, allowing for stable economic conditions.
Friedman's rationale can be illuminated through the quantity theory of money, where the equation of exchange is expressed as MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real output. In the long run, changes in the money supply primarily affect the price level. If the expected inflation rate matches the actual inflation rate, economic agents can make informed decisions, and the quantity theory of money holds. This alignment of expectations and outcomes contributes to the stability and equilibrium of the economy.
Conversely, if there is a dissonance between expected and actual inflation rates, economic agents may misjudge future economic conditions, leading to disruptions in consumption, investment, and overall economic activity. Friedman's emphasis on the equality of expected and actual inflation rates highlights the importance of well-informed expectations in achieving long-run economic equilibrium.