TOPIC 7. Unemployment, Inflation and Economic Policy
|
|
- Martin Ward
- 5 years ago
- Views:
Transcription
1 TOPIC 7 Unemployment, Inflation and Economic Policy
2 What is Equilibrium for the Economy? Short run equilibrium: AD = SRAS and IS = LM The Labor Market need not be in equilibrium We need not be at the potential level of GDP Long run equilibrium: AD = SRAS = Y* and IS = LM = Y* and N d = N s = N* In the long run, by definition, we will move to Y*. In the long run, by definition, the labor market will clear. 2
3 3 Graphical Representation of the Economy in Recession (1 P Y* = f(n*,k,a SRAS(1=f(input prices AD = f(g,pvlr,taxes,y f,m,π e Y e sr Y* Y
4 4 Graphical Representation of the Economy in Recession (2 P Y* = f(n*,k,a SRAS(2= f(input prices AD = f(g,pvlr,taxes,y f,m,π e Y e sr Y* Y
5 More on Equilibrium Equilibrium is a point of attraction for the economy: Most macroeconomists believe that, in the absence of shocks, the economy would reach equilibrium after perhaps 5 years. Thus the economy is in equilibrium in the long run (after 5 years. Is the economy ever in long run equilibrium? Given that shocks are always hitting, the economy is not likely to be in long run equilibrium at any point in time. Yet the force of attraction of equilibrium keeps the economy hovering around the equilibrium. Why is the long run equilibrium point attractive? Because at it the labor market clears. Away from Y* workers are not on their labor supply curve (and firms may be off their labor demand curve. Maximizing behavior by workers and firms push the economy towards long run equilibrium. Shocks push the economy away temporarily. 5
6 How do we represent recessions? Official Definition - two consecutive quarters of negative real GDP growth Our Model: Y < Y*, We define a recssionary gap (output gap as being Y* - Y e sr Remember: Y* trends upward overtime (even though in our model - we have it constant - population growth, K grows (we abstract from these trends in our model, TFP is growing every period. It makes things easier to keep Y* constant initially. Our Model removes the trends in N and K due to population growth and K (by assumption. Questions of the rest of class: What causes recessions? Why would the fed be concerned about inflation when Y sr e >Y*? How do we get out of recessions once we are in them? Can the economy correct itself? 6
7 7 Where Do Recessions Come From? 1. Shocks to Expectations (individual beliefs about the future - ie, stocks are overvalued, a recession will be coming (self fulling prophesies, etc. 2. Increases in relative prices of inputs (like oil 3. Temporary or Permanent changes in technology (or productivity - drought? 4. Bad (or good Policy (monetary or fiscal 5. Unexpected Deflations (maybe
8 Example 1: Changes in Consumer Confidence A change in expectations about the future (whether founded or not can have dramatic effects on the economy. Consumer Confidence Irrational Exuberance Paradox of Savings Households expect the future to be good or bad. No effect on labor demand (A hasn t really changed. Some effect on labor supply (Households expect PVLR to have changed. Households work more or less (depending on whether they think PVLR has decreased or increased. Consumption changes and the AD and IS curves shift 1990 Recession (a fall in consumer confidence from the Gulf War Note: I will often assume small (or no income effects on labor supply. 8
9 Consumer Confidence:
10 10 Analyzing a Decrease in Consumer Confidence No Effect on A or A(future P P 0 Y* 0 SRAS(W 0 AD(C 0 Y Assume we start at Y* Assume consumers are standard PIH (i.e., nonliquidity constrained, nonricardian. Assume no income effect on labor supply. r LM(P 0 IS(C 0 Y* 0 Y
11 11 Analyzing a Decrease in Consumer Confidence 1. What happens in the short run if SRAS is upward-sloping? 2. What happens in the short run if SRAS is horizontal? 3. What happens in the long run? DEMAND SHOCK: Unemployment and Prices move in opposite directions in the long run if there are no Policies!
12 12 Irrational Exuberance Mistaken belief in higher A f shifts IS/AD rightward, and shifts Y* leftward due to lower N* (income effect - may be small!. The boost in perceived PVLR and future MPK raises demand for C and I goods, shifting the IS/AD rightward. The higher perceived PVLR reduces N* and shifts the LRAS. Note: current A does not rise (so labor demand does not shift. In the SR, the economy moves to the new IS/ LM intersection, with higher Y and higher r. Firms respond to the higher goods demand by producing more (to achieve this they hire more N. The economy moves to Y > Y*, N > N*, and U < U*. Prices Increase!!! Irrational Exuberance could cause inflation (higher prices - in both the short run and the long run!
13 13 Example 2: an Increase in Oil Prices Responsible (partially for the 1975 and recession (OPEC I and II P SRAS(W 0, Oil 0 P 0 r Y* 0 AD Y LM(P 0 IS Y* 0 Y
14 14 Analyzing an increase in the price of Oil Supply shocks cause unemployment and prices to move in the same direction (VERY DIFFERENT FROM DEMAND SHOCKS! Supply Shocks: oil and technology! Demand Shocks: M, G, T and consumer confidence As we will see soon - supply shocks could have demand effects! A negative supply shock is BAD!!! STAGFLATION: increase in inflation + increase in unemployment
15 15 Example 3: An increase in A (a look at the 1990s P SRAS(W 0 P 0 r Y* 0 AD(C 0,I 0 Y LM(P 0 IS(C 0,I 0 Y* 0 Y
16 16 Analyzing an Increase in TFP (today Increase Y* (shift out labor demand and shift in labor supply - regardless if N increases or decreases, Y* will likely increase - the TFP effect will usually dominate. SRAS will shift Out (Cost of Production Falls AD and IS will shift Out (C and I will increase, PVLR and MPK will increase How far will AD and SRAS shift out? Depends - many cases. I give you one case (which the Fed believes the economy is currently in in the notes for this week. Summary, Y will increase in both short and long run. The effect on Prices is ambiguous, they could rise, fall or stay the same, interest rates will likely rise (although, it is not guaranteed if there is a sufficiently large drop in the price level, C will rise in short and long run, I will likely rise in short run and may rise in long run, Tax Revenues will increase, Public saving will rise, Private Saving is uncertain - may stay the same, may rise or may fall - depending on the timing of the technology changes and the instruments used to hold wealth (ie, pensions.
17 17 Analyzing an Increase in TFP Short Run This is what the Fed thought that we were in during Spring 2000: Technology rose Consumption has been increasing Investment has been rising Unemployment is lower than the estimated natural rate of unemployment Prices have been relatively stable DESPITE the rapid growth in GDP The labor market is tight another word for wages may rise in the future.
18 18 What the Fed was worried about? Long Run Given that Y > Y*, nominal wages have to rise to clear the labor market! This shifts the SRAS in. This will reduce Y back to Y*, but will increase prices! The Fed was worried exactly about Inflation!!!
19 Reviewing The Data From First Class: We saw that some falls in GDP were associated with no increase in prices. We also so that some falls in GDP were associated with large increase in prices. Do our theories reconcile these facts? YES! Demand shocks result in recessions without a corresponding rise in prices. YES! Supply shocks (like changes in oil prices result in recessions with a large corresponding change in prices. You should really understand the difference between demand shocks (things that primarily affect AD and supply shocks (things that primarily affect AS on the economy - their implications are much different from each other. 19
20 20 Review: A Look at U.S. Inflation 1970M1-2006M11 Black line - trend in CPI over time (left axis Red line - trend in CPI inflation rate (percentage change in CPI over time (right axis Shaded areas represent official recession dates (as calculated by National Bureau of Economic Research
21 Review: A Look at U.S. Real GDP 1970Q1 2006Q3 Black line - trend in real GDP over time (black axis Red line - trend in real GDP growth (percentage change in real GDP over time (right axis Shaded areas represent official recession dates (as calculated by National Bureau of Economic Research 21
22 Some Examples 1974 Recession: OPEC - rapid increase in prices Misguided Fed Policy 1980 Recession: OPEC II 1982 Recession: Good Fed Policy! (Volker Recession 1990 Recession: Consumer Confidence (Paradox of Saving 1990 s Japan: End to speculative bubbles, bad policy, debt overhand and liquidity traps. 22
23 23 Prelude to a Policy Notes on Monetary and Fiscal Policy: NOT AN EXACT SCIENCE - How much stimulus is necessary to move the economy to Y* Policy Creates uncertainty as economic agents try to anticipate Fed/Government rules Some argue to avoid using stabilization policy (just a simple Quantity Theory representation or suggest using very simple rules. Policy often entails long and variable lags! Some research says that every sustained period of large inflation is due to the Fed!
24 24 Back to Example 1: Can the FED do something? Back to the example of loss in the consumers confidence If the Fed want to bring the economy back to Y*, it could increase the nominal money supply We are going to look at money supply setting (as opposed to interest rate setting - we will do that soon Assume there has been a recession driven by loss of consumers confidence Fed increases M and LM shifts right, r falls and I increases. AD shifts out - Y increases (back to Y*. Nominal wages do not need to be cut Prices and Y* go back to where they started!
25 25 An Example of Monetary Policy: Stabilizing Output Loss of Consumers Confidence P SRAS(W 0 A P 0 B AD(C 0,M 0 r P 1 C Y 1 AD(C 1, M 0 Y* Y 0 LM(M 0,P 0 A LM(M 0,P 1 B C IS(C 0 Y 1 Y* 0 IS(C 1 Y
26 26 Fed versus Self-correcting Mechanism COMPARISON: 1. Real variables go back to the same long run equilibrium (both Fed or self-correcting mechanism 2. BUT prices and nominal wages behave differently! 3. Fed can increase the speed of adjustment
27 27 An Example of Fiscal Policy: Stabilizing Output Loss of Consumers Confidence P SRAS(W 0 A P 0 B AD(C 0,M 0 r P 1 C Y 1 AD(C 1, M 0 Y* Y 0 LM(M 0,P 0 A LM(M 0,P 1 B C IS(C 0 Y 1 Y* 0 IS(C 1 Y
28 28 An Example of Monetary Policy: Inflation Control Consumer Confidence Increases By A lot (Irrational Exuberance P SRAS (W 0 P 0 r Y* 0 AD(C AD(C 0 1 Y LM(P 1 LM(P 0 IS(C 1 IS(C 0 Y* 0 Y
29 29 When Does Policy Not Work? Vertical IS Curve: What if firms don t respond to interest rate changes (they think future economic conditions are going to be bad or interest rates will be lower in the future or the banking system has problems making loans. Monetary Policy Becomes Dampened. Central bank becomes powerless because nominal rates are already so low! (Deflationary periods Keynesian Liquidity Trap: Japan today
30 30 A Look At Liquidity Traps Read Krugman s Babysitting the Economy (From Week 1 Nominal Interest Rates Are Bounded At Zero! People Believe that there will be deflation in the future! Real Interest Rates are Large and Positive. Fed Would like to cut rates (to stimulate Y (shift out AD which will put upward pressure on prices, but nominal rates cannot go below zero! The Fed is helpless. How do they stimulate when they cannot cut rates? This describes the situation in Japan during the late 1990s. Japan has experienced deflation AND nominal rates are close to zero. Central Bank of Japan is helpless.
31 31 Demand Side Effects of Deflation Deflation can make borrowers - either consumers or firms, worse off. As we saw early in the course, unexpected inflation makes borrowers better off. They expected to pay a certain real rate and when inflation is higher and the nominal rate is fixed, the real rate they pay is lower (in terms of lost purchasing power. If the economy experiences unexpected deflation, the opposite happens: borrowers are paying more in terms of lost real purchasing power when there is unexpected deflation. Borrowers, both consumers and firms, will essentially be poorer. (Even though, there is another side of the market - somebody s got to lend to them, this could still have large effects on consumption and investment. This demand side effect of deflation is called debt overhang or debt deflation. <<Note, even the government is paying higher than expected real rates on their debt>>. Even if the deflation is expected, large transfers can occur from borrowers to lenders because nominal interest rates are bounded by zero (shuts down lending channels.
32 32 Change in Prices versus Inflation Labor Markets are forward looking! Change in prices become dynamic If workers expect high inflation they will try to get higher nominal wages! Two Examples: Supply Push Inflation: Accommodating supply shocks can lead to persistent inflation (the Fed in the mid and late 70s. Workers see this, and adjust. They ask for higher W and shift the SRAS in, pushing inflation up! Demand Pull Inflation: Policy makers try to permanently keep the economy above its potential level. Wages keep adjusting.
33 33 Accommodating Inflation after an Oil Shock Supply - Push and Accommodation P AS(Oil 1 AS(Oil 0 Y 1 * AD(Oil 0, M 0 Y* AD(Oil 1,M 0 Y
34 How do we get out of Supply-Push Inflation Fed Can Break the Inflation! Reset, expected inflation rates. The Volker Recession (Volker, an extremely underrated Fed Chair. Cold Turkey money cut to try to change individuals perception of the Fed policy (not try to stabilize output at the expense of inflation! Cut inflation from double digits to 4%! However this caused a short deep recession. 34
35 35 Graphing Demand Pull Inflation Supply - Push and Accommodation P SRAS(W 0 Y* AD(M 0 Y
36 36 On unemployment and inflation In the short run, if Y < Y*, we have a recession, then u > u* and unemployment goes up! If the negative shock was to the supply, then prices go up, if it was at the demand, they go down Output stabilization policies tend to generate inflation Inflation control policies tend to generate a recession Can we say something more about the relationship between unemployment and inflation?
37 The Phillips Curve is born. Discoverer: British economist A.W. Phillips. Discovery: A negative correlation between the unemployment rate and the inflation rate across years within a country in the 1950s. The correlation was also negative in the U.S. and other countries through the 1960s. Old Keynesians in the 1960s: We have found a stable, exploitable tradeoff between the rate of inflation and the rate of unemployment. We can permanently lower the rate of unemployment at the cost of a permanently higher inflation rate. 37
38 Unemployment and Inflation
39 39 Friedman, evidence killed it. Milton Friedman in 1968: The LR Phillips Curve is vertical. Vindicating evidence: The Phillips Curve broke down after Over time in the U.S., higher money growth just leads to more inflation and no higher real GDP. Across countries, higher money growth just leads to more inflation and no higher real GDP. Real GDP actually appears to be hindered by high levels of inflation.
40 Unemployment and Inflation
41 Unemployment and Inflation
42 42 Why is Long Run Phillips Curve Vertical Self Correcting Mechanism You Cannot Sustain Y > Y* forever Quantity Theory Graph! π e LR SR u* u
43 43 Is There a Short Run Trade Off? SR tradeoff between the unemployment rate and inflation rate changes: Inflation tends to fall in years following U > U*. The cost of a permanently lower inflation rate is a temporarily higher unemployment rate. Inflation tends to rise in years following U < U*. The cost of temporarily lowering the unemployment rate is a permanently higher inflation rate. This is why Fed is currently worried about inflation! Demand Shocks cause a negative relationship between P and U (early 80s! Supply Shocks cause a positive relationship between P and U (the 70s and the late 90s
44 44 Goals of the Fed The Fed wants to set r so that r = r*, Y = Y*, U = U*, N = N* ( these are equivalent. π = π * (0-2% inflation. The Fed wants to raise r when r < r*, Y > Y*, U < U*, N > N* π > π * The Fed wants to lower r when the opposite conditions hold.
45 45 Rules vs. Discretion Should a central bank have a specific policy rule? Rules are explicit and may be mandated by law Money should grow at 4% per year (Friedman preferred rule. Rules may be implicit and known by all economic agents The Fed will target the inflation rate at 2-4% per year.
46 46 Benefits of Rules Commits Central Bank to Some Policy Removes Inflation Temptation Creates a more stable economic situation: Individuals and Firms can anticipate the central bank actions. No surprises! Prevents central bank from thinking too much - the economy is so complex that Fed policy can have delayed impact and is usually initiated too late! Central Bank actions can often be destabilizing. (Freidman, Lucas: Both prefer simple rules.
47 47 Fed Timing Recession Begins First Fed nominal rate cut December months later November months later July months later July months later
48 48 Discretion Central Bank uses all information possible to make the best decision at the time. The Fed uses a discretionary rule. The members of the bank vote on a monetary policy eat each meeting. The policy is not dictated by some explicit rule. Benefits of Discretion: Allows Central Bank to choose from competing policy goals. (Sometimes inflation targeting is not best for the economy The Fundamentals of the Economy may change/or evolve over time - the rule becomes outdated. How do we know where the economy is relative to Y* and target inflation rate? Information flows slowly and is complex to analyze.
49 Hawks and Doves How does the Fed balance price stability (π = π * and full employment (U = U* when they conflict? [For example, when π > π * and U > U* at the same time.] Hawks put more weight on π * (and have lower values for it. U.K., Canada, New Zealand. Bundesbank before; European Central Bank now? Doves put more weight on staying near U* (and have higher π *. Bernanke tends to puts the same weight on each. 49
50 50 The Taylor Rule John Taylor of Stanford University: the Fed s behavior under Greenspan ( and Bernanke (today is well-described by: Taylor Rule: i = r* + π e +.5*(π e - π e * +.5*(Y - Y*/Y* i = the nominal federal funds rate. r* = the real fed funds rate target (this is the r consistent with Y=Y*. π e = expected inflation. π e * = target inflation. Y = real GDP. Y* = equilibrium real GDP (Y-Y*/Y* is the output gap or GDP gap. A positive output gap means overheating and potentially rising inflation (labor markets will demand higher wages. Taylor used r* = 2% and π e * = 2%. The Taylor Rule explains about 2/3 of quarterly variation in the fed funds rate since 1987.
51 Notes on the Taylor Rule Fed economists find an even better fit with 1 on the GDP gap term. This does NOT mean that Bernanke uses this rule, it is just that Fed behavior looks very similar to this rule. Furthermore, the Fed tends to smooths interest rates relative to the Taylor Rule: this quarter s actual i =.6*(last quarter s actual i +.4*(Taylor Rule i Studies have found that other G7 Central Banks (e.g., the Bundesbank have also followed versions of a smoothed Taylor Rule. Read the speeches by Bernanke, Greenspan and Gramlich to see the Fed s take on such subject. 51
52 52 What Should We Have Learned In the short run, wages (or prices are sticky, the labor market is in disequilibrium, output and employment are away from their potential level. Shocks to the aggregate demand make prices and unemployment move in opposite directions Shocks to the aggregate supply make prices and unemployment move in the same direction Inflation-unemployment trade-off! Stabilization policies can increase inflation and inflation-targeting policy can increase unemployment. Taylor rule seems to describe well the Fed policy.
What is Equilibrium for the Economy?
TOPIC 7 Unemployment, Inflation and Economic Policy What is Equilibrium for the Economy? Short run equilibrium: AD = SRAS and IS = LM The Labor Market need not be in equilibrium We need not be at the potential
More informationThe Model at Work. (Reference Slides I may or may not talk about all of this depending on time and how the conversation in class evolves)
TOPIC 7 The Model at Work (Reference Slides I may or may not talk about all of this depending on time and how the conversation in class evolves) Note: In terms of the details of the models for changing
More informationTo sum up: What is an Equilibrium?
TOPIC 7 The Model at Work To sum up: What is an Equilibrium? SHORT RUN EQUILIBRIUM: AD = SRAS and IS = LM The Labor Market need not be in equilibrium We need not be at the potential level of GDP Y* If
More informationUnemployment, Inflation, and Economic Policy
Unemployment, Inflation, and Economic Policy Topic 7 1 Goals of Topic 7 Definition of Short-Run and Long-Run Equilibrium. An analysis of demand and supply shocks. Unemployment and Inflation Dynamics: Phillips
More informationTo sum up: What is an Equilibrium?
Classical vs Keynesian Theory To sum up: What is an Equilibrium? SHORT RUN EQUILIBRIUM: AD = SRAS and IS = LM The Labor Market need not be in equilibrium We need not be at the potential level of GDP Y*
More informationReview: Markets of Goods and Money
TOPIC 6 Putting the Economy Together Demand (IS-LM) 2 Review: Markets of Goods and Money 1) MARKET I : GOODS MARKET goods demand = C + I + G (+NX) = Y = goods supply (set by maximizing firms) as the interest
More informationAggregate Demand Curve (AD)
AS-AD AD Aggregate Demand Curve (AD) So far we have worked in the space {Y,r}. What happens to aggregate demand d if Prices increase? The AD curve is drawn in {Y,P} space. It represents how the demand
More informationMacroeconomics in the World Economy: Theory and Applications Topic 7: Unemployment & Inflation: Policy in Action
Macroeconomics in the World Economy: Theory and Applications Topic 7: Unemployment & Inflation: Policy in Action Dennis Plott University of Illinois at Chicago Department of Economics http://blackboard.uic.edu
More informationNotes 6: Examples in Action - The 1990 Recession, the 1974 Recession and the Expansion of the Late 1990s
Notes 6: Examples in Action - The 1990 Recession, the 1974 Recession and the Expansion of the Late 1990s Example 1: The 1990 Recession As we saw in class consumer confidence is a good predictor of household
More informationPutting the Economy Together
Putting the Economy Together Topic 6 1 Goals of Topic 6 Today we will lay down the first layer of analysis of an aggregate macro model. Derivation and study of the IS-LM Equilibrium. The Goods and the
More informationArchimedean Upper Conservatory Economics, November 2016 Quiz, Unit VI, Stabilization Policies
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The federal budget tends to move toward _ as the economy. A. deficit; contracts B. deficit; expands C.
More informationSuggested Answers Problem Set # 5 Economics 501 Daniel
1. Use graphs of IS-LM-FE and AS-AD models to explain why RBC models with productivity shocks and money-supply shocks fail to explain the pro-cyclicality of money growth and inflation. Inflation falls
More informationInternational Money and Banking: 15. The Phillips Curve: Evidence and Implications
International Money and Banking: 15. The Phillips Curve: Evidence and Implications Karl Whelan School of Economics, UCD Spring 2018 Karl Whelan (UCD) The Phillips Curve Spring 2018 1 / 26 Monetary Policy
More informationIII. 9. IS LM: the basic framework to understand macro policy continued Text, ch 11
Objectives: To apply IS-LM analysis to understand the causes of short-run fluctuations in real GDP and the short-run impact of monetary and fiscal policies on the economy. To use the IS-LM model to analyse
More information6. The Aggregate Demand and Supply Model
6. The Aggregate Demand and Supply Model 1 Aggregate Demand and Supply Curves The Aggregate Demand Curve It shows the relationship between the inflation rate and the level of aggregate output when the
More informationOutline. How the banking system works? What is the Fed and how does it work? What is a monetary policy?
FdPli Fed Policy and dm Money Markets kt 1 Outline How the banking system works? What is the Fed and how does it work? What is a monetary policy? What about the current credit crunch? 2 Money Supply We
More informationLecture 12: Economic Fluctuations. Rob Godby University of Wyoming
Lecture 12: Economic Fluctuations Rob Godby University of Wyoming Short-Run Economic Fluctuations Economic activity fluctuates from year to year. In some years, the production of goods and services rises.
More informationChapter 9 Chapter 10
Assignment 4 Last Name First Name Chapter 9 Chapter 10 1 a b c d 1 a b c d 2 a b c d 2 a b c d 3 a b c d 3 a b c d 4 a b c d 4 a b c d 5 a b c d 5 a b c d 6 a b c d 6 a b c d 7 a b c d 7 a b c d 8 a b
More informationAggregate Supply and Aggregate Demand
Aggregate Supply and Aggregate Demand ECO 301: Money and Banking 1 1.1 Goals Goals Specific Goals Be able to explain GDP fluctuations when the price level is also flexible. Explain how real GDP and the
More informationMacroeconomics 1 Lecture 11: ASAD model
Macroeconomics 1 Lecture 11: ASAD model Dr Gabriela Grotkowska Lecture objectives difference between short run & long run aggregate demand aggregate supply in the short run & long run see how model of
More informationECON Intermediate Macroeconomic Theory
ECON 3510 - Intermediate Macroeconomic Theory Fall 2015 Mankiw, Macroeconomics, 8th ed., Chapter 12 Chapter 12: Aggregate Demand 2: Applying the IS-LM Model Key points: Policy in the IS LM model: Monetary
More informationIntroduction to Economic Fluctuations. Instructor: Dmytro Hryshko
Introduction to Economic Fluctuations Instructor: Dmytro Hryshko 1 / 32 Outline facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an introduction
More informationMankiw Chapter 10. Introduction to Economic Fluctuations. Introduction to Economic Fluctuations CHAPTER 10
Mankiw Chapter 10 0 IN THIS CHAPTER, WE WILL COVER: facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an introduction to aggregate supply in
More informationChapter 9 Introduction to Economic Fluctuations
Chapter 9 Introduction to Economic Fluctuations facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an introduction to aggregate supply in the
More informationAGGREGATE SUPPLY, AGGREGATE DEMAND, AND INFLATION: PUTTING IT ALL TOGETHER Macroeconomics in Context (Goodwin, et al.)
Chapter 13 AGGREGATE SUPPLY, AGGREGATE DEMAND, AND INFLATION: PUTTING IT ALL TOGETHER Macroeconomics in Context (Goodwin, et al.) Chapter Overview This chapter introduces you to the "Aggregate Supply /Aggregate
More informationFinal Exam Macroeconomics Winter 2011 Prof. Veronica Guerrieri
Final Exam Macroeconomics Winter 2011 Prof. Veronica Guerrieri Name (print): Name (signature): Section Registered (circle one): T 1:30 T 6:00 W 1:30 As always, the honor code rules are in effect. You know
More informationReview: objectives. CHAPTER 2 The Data of Macroeconomics slide 0
Review: objectives Remind you of the main theories. Overview of how parts of the course all fit together. Draw the most important and general lessons to remember from the course. CHAPTER 2 The Data of
More informationMacroeconomics. Introduction to Economic Fluctuations. Zoltán Bartha, PhD Associate Professor. Andrea S. Gubik, PhD Associate Professor
Institute of Economic Theories - University of Miskolc Macroeconomics Introduction to Economic Fluctuations Zoltán Bartha, PhD Associate Professor Andrea S. Gubik, PhD Associate Professor Business cycle:
More informationTHE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT
22 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT LEARNING OBJECTIVES: By the end of this chapter, students should understand: why policymakers face a short-run tradeoff between inflation and
More informationECON 3150: Exam 2 study guide
ECON 3150: Exam 2 study guide July 26, 2015 Unemployment 1. Define the unemployment rate 2. Define the labor force participation rate 3. Know historic LF participation rate trends in the US 4. Why has
More informationCanadian Inflation, Unemployment, and Business Cycle
28 Canadian Inflation, Unemployment, and Business Cycle After studying this chapter you will be able to! Explain how demand-pull and cost-push forces bring cycles in inflation and output! Explain the short-run
More informationModule 31. Monetary Policy and the Interest Rate. What you will learn in this Module:
Module 31 Monetary Policy and the Interest Rate What you will learn in this Module: How the Federal Reserve implements monetary policy, moving the interest to affect aggregate output Why monetary policy
More informationExpectations Theory and the Economy CHAPTER
Expectations and the Economy 16 CHAPTER Phillips Curve Analysis The Phillips curve is used to analyze the relationship between inflation and unemployment. We begin the discussion of the Phillips curve
More information9. ISLM model. Introduction to Economic Fluctuations CHAPTER 9. slide 0
9. ISLM model slide 0 In this lecture, you will learn an introduction to business cycle and aggregate demand the IS curve, and its relation to the Keynesian cross the loanable funds model the LM curve,
More informationchapter: Aggregate Demand and Aggregate Supply Aggregate Demand The Aggregate Demand Curve The Aggregate Demand Curve
>> chapter: 1 Demand and Supply Krugman/Wells WHAT YOU WILL LEARN IN THIS CHAPTER " How the demand curve illustrates the relationship between the and the quantity of output demanded in the economy " How
More informationDisclaimer: This resource package is for studying purposes only EDUCATION
Disclaimer: This resource package is for studying purposes only EDUCATION Ch 26: Aggregate Demand and Aggregate Supply Aggregate Supply Purpose of aggregate supply: aggregate demand model is to explain
More informationAggregate Demand and Aggregate Supply
chapter: Krugman/Wells 28 Aggregate Demand and Aggregate Supply The following materials are taken from Chap. 28, Economics, 2 nd ed., Krugman and Wells(2009), Worth Palgrave MaCmillan. 1 of 58 WHAT YOU
More informationQuestions and Answers. Intermediate Macroeconomics. Second Year
Questions and Answers Intermediate Macroeconomics Second Year Chapter2 Q1: MCQ 1) If the quantity of money increases, the A) price level rises and the AD curve does not shift. B) AD curve shifts leftward
More informationModule 19 Equilibrium in the Aggregate Demand Aggregate Supply Model
What you will learn in this Module: The difference between short-run and long-run macroeconomic equilibrium The causes and effects of demand shocks and supply shocks How to determine if an economy is experiencing
More informationAP Econ Practice Test Unit 5
DO NOT WRITE ON THIS TEST! AP Econ Practice Test Unit 5 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The marginal propensity to consume is equal to:
More informationINFLATION, JOBS, AND THE BUSINESS CYCLE*
Chapt er 12 INFLATION, JOBS, AND THE BUSINESS CYCLE* Key Concepts Inflation Cycles1 In the long run inflation occurs because the quantity of money grows faster than potential GDP. Inflation can start as
More information5. An increase in government spending is represented as a:
Romer Section 1 1. The IS curve represents combinations of Y and r that: a. are consistent with equilibrium in the money market. b. are consistent with equilibrium in the goods market. c. are positively
More information10. Oferta y demanda agregada
10. Oferta y demanda agregada In this chapter, look for the answers to these questions: What are economic fluctuations? What are their characteristics? How does the model of aggregate demand and aggregate
More informationLecture 22. Aggregate demand and aggregate supply
Lecture 22 Aggregate demand and aggregate supply By the end of this lecture, you should understand: three key facts about short-run economic fluctuations how the economy in the short run differs from the
More informationNew Keynesian Model. Prof. Eric Sims. Fall University of Notre Dame. Sims (ND) New Keynesian Model Fall / 20
New Keynesian Model Prof. Eric Sims University of Notre Dame Fall 2012 Sims (ND) New Keynesian Model Fall 2012 1 / 20 New Keynesian Economics New Keynesian (NK) model: leading alternative to RBC model
More information13.2 Monetary Policy Rules and Aggregate Demand Introduction 6/24/2014. Stabilization Policy and the AS/AD Framework.
Chapter 13 Stabilization Policy and the / Framework By Charles I. Jones 13.2 Monetary Policy Rules and Aggregate Demand The short-run model consists of three basic equations: Media Slides Created By Dave
More informationECON 209 FINAL EXAM COURSE PACK FALL 2017
ECON 209 FINAL EXAM COURSE PACK FALL 2017 www.sleepingpolarbear.ca HANDCRAFTED WITH IN THE NORTH POLE ~ TABLE OF CONTENTS ~ ECON 209: FINAL EXAM COURSE PACK SECTION 1 (CH 19-20): INTRO TO MACRO & GDP ACCOUNTING...
More informationSession 9. The Interactions Between Cyclical and Long-term Dynamics: The Role of Inflation
Session 9. The Interactions Between Cyclical and Long-term Dynamics: The Role of Inflation Potential Output and Inflation Inflation as a Mechanism of Adjustment The Role of Expectations and the Phillips
More informationThe Conduct of Monetary Policy
The Conduct of Monetary Policy This lecture examines the strategies and tactics central banks use to conduct monetary policy. Price Stability, a Nominal Anchor, and the Time-Inconsistency Problem A. Price
More informationEcon 102 Final Exam Name ID Section Number
Econ 102 Final Exam Name ID Section Number 1. Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment
More informationLesson 11 Aggregate demand and Aggregate Supply
Lesson 11 Aggregate demand and Aggregate Supply Henan University of Technology Sino-British College Transfer Abroad Undergraduate Programme 0 In this lesson, look for the answers to these questions: What
More informationPractice Problems
Practice Problems 33-34-36 1. The inflation tax is: A. the higher tax paid by individuals whose incomes are indexed to inflation. B. the taxes paid during periods of inflation. C. the reduction in the
More informationAggregate Demand and Aggregate Supply
C H A P T E R 33 Aggregate Demand and Aggregate Supply Economics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2009 South-Western, a part of Cengage Learning, all
More informationChapter 12 Aggregate Demand II: Applying the IS -LM Model
Chapter 12 Aggregate Demand II: Applying the IS -LM Model Modified by un Wang Eco 3203 Intermediate Macroeconomics Florida International University Summer 2017 2016 Worth Publishers, all rights reserved
More informationMacro CH 29 sample questions
Class: Date: Macro CH 29 sample questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The relationship between real GDP and potential GDP over the
More informationInflation and the Phillips Curve
CHAPTER 33 Inflation and the Phillips Curve The first few months or years of inflation, like the first few drinks, seem just fine. Everyone has more money to spend and prices aren t rising quite as fast
More informationUnemployment and Inflation
Unemployment and Inflation By A. V. Vedpuriswar October 15, 2016 Inflation This refers to the phenomenon by which the price level rises and money loses value. There are two kinds of inflation: Demand pull
More informationOpening the Economy. Topic 9
Opening the Economy Topic 9 Goals of Topic 9 What is the exchange rate? NX is back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect
More informationNotes From Macroeconomics; Gregory Mankiw. Part 4 - BUSINESS CYCLES: THE ECONOMY IN THE SHORT RUN
Part 4 - BUSINESS CYCLES: THE ECONOMY IN THE SHORT RUN Business Cycles are the uctuations in the main macroeconomic variables of a country (GDP, consumption, employment rate,...) that may have period of
More informationPART XII: SHORT-RUN ECONOMIC FLUCTUATIONS AGGREGATE DEMAND AND AGGREGATE SUPPLY. Chapter 33
1 PART XII: SHORT-RUN ECONOMIC FLUCTUATIONS AGGREGATE DEMAND AND AGGREGATE SUPPLY Chapter 33 What did we learn so far? Macroeconomics studies the economy as a whole It aims to explain economic events that
More informationAggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply Aggregate Demand and Aggregate Supply The Learning Objectives in this presentation are covered in Chapter 20: Aggregate Demand and Aggregate Supply LEARNING OBJECTIVES
More informationChapter Eighteen 4/19/2018. Linking Tools to Objectives. Linking Tools to Objectives
Chapter Eighteen Chapter 18 Monetary Policy: Stabilizing the Domestic Economy Part 3 Linking Tools to Objectives Tools OMO Discount Rate Reserve Req. Deposit rate Linking Tools to Objectives Monetary goals
More informationPrices and Output in an Open Economy: Aggregate Demand and Aggregate Supply
Prices and Output in an Open conomy: Aggregate Demand and Aggregate Supply chapter LARNING GOALS: After reading this chapter, you should be able to: Understand how short- and long-run equilibrium is reached
More informationChapter 9. Introduction to Economic Fluctuations
Chapter 9 Introduction to Economic Fluctuations 0 1 Learning Objectives difference between short run & long run introduction to aggregate demand aggregate supply in the short run & long run see how model
More informationChapter 13: Aggregate Demand and Aggregate Supply Analysis
Chapter 13: Aggregate Demand and Aggregate Supply Analysis Yulei Luo SEF of HKU March 20, 2016 Learning Objectives 1. Identify the determinants of aggregate demand and distinguish between a movement along
More informationTradeoff Between Inflation and Unemployment
CHAPTER 13 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment Questions for Review 1. In this chapter we looked at two models of the short-run aggregate supply curve. Both models
More informationTOPIC 9. International Economics
TOPIC 9 International Economics 2 Goals of Topic 9 What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect
More informationchapter: Aggregate Demand and Aggregate Supply 10(1 st ) or 12(2 nd ) ECON Feb. 1, 3, 5 1of Worth Publishers
chapter: 10(1 st ) or 12(2 nd ) >> Aggregate Demand and Aggregate Supply ECON 2020-010 Feb. 1, 3, 5 2009 Worth Publishers 1of 58 Opening Example Who is the chairman of the Federal Reserve? Federal reserve:
More informationCanadian Inflation, Unemployment, and Business Cycle
28 Canadian Inflation, Unemployment, and Business Cycle Learning Objectives Explain how demand-pull and cost-push forces bring cycles in inflation and output Explain the short-run and long-run tradeoff
More informationIntroduction. Over the long run, real GDP grows about 3% per year on average.
Introduction Over the long run, real GDP grows about 3% per year on average. In the short run, GDP fluctuates around its trend. Recessions: periods of falling real incomes and rising unemployment Depressions:
More informationECONOMIC GROWTH 1. THE ACCUMULATION OF CAPITAL
ECON 3560/5040 ECONOMIC GROWTH - Understand what causes differences in income over time and across countries - Sources of economy s output: factors of production (K, L) and production technology differences
More informationThe aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output in the economy.
Chapter 32 The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output in the economy. GDP Deflator can be used as a measure of the price level
More informationObjectives for Chapter 24: Monetarism (Continued) Chapter 24: The Basic Theory of Monetarism (Continued) (latest revision October 2004)
1 Objectives for Chapter 24: Monetarism (Continued) At the end of Chapter 24, you will be able to answer the following: 1. What is the short-run? 2. Use the theory of job searching in a period of unanticipated
More informationIntroduction to Economic Fluctuations
CHAPTER 10 Introduction to Economic Fluctuations Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, OU WILL LEARN: facts about the business cycle how the short
More informationEconomics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary
Economics 102 Discussion Handout Week 14 Spring 2018 Aggregate Supply and Demand: Summary The Aggregate Demand Curve The aggregate demand curve (AD) shows the relationship between the aggregate price level
More informationChapter 13. Aggregate Demand and Aggregate Supply
Chapter 13 Aggregate Demand and Aggregate Supply 1 Output and Price Level Figure 1 Two-Way Relationship Between Output and Price Level Aggregate Demand Curve Price Level Real GDP Aggregate Supply Curve
More informationOutline for ECON 701's Second Midterm (Spring 2005)
Outline for ECON 701's Second Midterm (Spring 2005) I. Goods market equilibrium A. Definition: Y=Y d and Y d =C d +I d +G+NX d B. If it s a closed economy: NX d =0 C. Derive the IS Curve 1. Slope of the
More informationAggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply Chapter 19 Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,
More informationECON 3312 Macroeconomics Exam 3 Spring 2016
ECON 3312 Macroeconomics Exam 3 Spring 2016 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose there is an increase in expected future
More informationConsumption, Saving, and Investment. Chapter 4. Copyright 2009 Pearson Education Canada
Consumption, Saving, and Investment Chapter 4 Copyright 2009 Pearson Education Canada This Chapter In Chapter 3 we saw how the supply of goods is determined. In this chapter we will turn to factors that
More informationIntroduction to Economic Fluctuations
Chapter 9 Introduction to Economic Fluctuations slide 0 In this chapter, you will learn facts about the business cycle how the short run differs from the long run an introduction to aggregate demand an
More informationSuggested Solutions to Problem Set 7
Econ 154b Spring 2005 Question 1 Suggested Solutions to Problem Set 7 The IS curve is Y C d I d G 600 0.8ŸY"1000 "500r 400"500r 1000, so 0.2Y 1200"1000r. This is plotted below: Since= e 0, the nominal
More informationTHE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND
20 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND LEARNING OBJECTIVES: By the end of this chapter, students should understand: the theory of liquidity preference as a short-run theory
More informationAGGREGATE DEMAND AGGREGATE SUPPLY
AGGREGATE DEMAND 8 AND CHAPTER AGGREGATE SUPPLY A Way to View the Economy We can think of an economy as consisting of two major activities: buying and producing. When economists speak about aggregate demand,
More informationAdvanced Macroeconomics 4. The Zero Lower Bound and the Liquidity Trap
Advanced Macroeconomics 4. The Zero Lower Bound and the Liquidity Trap Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) The Zero Lower Bound Spring 2015 1 / 26 Can Interest Rates Be Negative?
More informationAggregate Supply and Demand Model
THE AGGREGATE MODEL Aggregate Supply and Demand Model The AS-AD model helps us understand aggregate output (RGDP), employment, prices and the business cycle. Aggregate Demand shows the quantity of goods
More informationII. Determinants of Asset Demand. Figure 1
University of California, Merced EC 121-Money and Banking Chapter 5 Lecture otes Professor Jason Lee I. Introduction Figure 1 shows the interest rates for 3 month treasury bills. As evidenced by the figure,
More informationMacroeconomics, Cdn. 4e (Williamson) Chapter 1 Introduction
Macroeconomics, Cdn. 4e (Williamson) Chapter 1 Introduction 1) Which of the following topics is a primary concern of macro economists? A) standards of living of individuals B) choices of individual consumers
More informationCost Shocks in the AD/ AS Model
Cost Shocks in the AD/ AS Model 13 CHAPTER OUTLINE Fiscal Policy Effects Fiscal Policy Effects in the Long Run Monetary Policy Effects The Fed s Response to the Z Factors Shape of the AD Curve When the
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
Econ 330 Spring 2015: FINAL EXAM Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose a report was released today that
More informationSticky Wages and Prices: Aggregate Expenditure and the Multiplier. 5Topic
Sticky Wages and Prices: Aggregate Expenditure and the Multiplier 5Topic Questioning the Classical Position and the Self-Regulating Economy John Maynard Keynes, an English economist, changed how many economists
More informationTest Review. Question 1. Answer 1. Question 2. Answer 2. Question 3. Econ 719 Test Review Test 1 Chapters 1,2,8,3,4,7,9. Nominal GDP.
Question 1 Test Review Econ 719 Test Review Test 1 Chapters 1,2,8,3,4,7,9 All of the following variables have trended upwards over the last 40 years: Real GDP The price level The rate of inflation The
More informationEconomics 102 Discussion Handout Week 14 Spring Aggregate Supply and Demand: Summary
Economics 102 Discussion Handout Week 14 Spring 2018 Aggregate Supply and Demand: Summary The Aggregate Demand Curve The aggregate demand curve (AD) shows the relationship between the aggregate price level
More informationIntroduction. Learning Objectives. Chapter 17. Stabilization in an Integrated World Economy
Chapter 17 Stabilization in an Integrated World Economy Introduction For more than 50 years, many economists have used an inverse relationship involving the unemployment rate and real GDP as a guide to
More informationChapter 11 The Determination of Aggregate Output, the Price Level, and the Interest Rate
Principles of Macroeconomics Twelfth Edition Chapter 11 The Determination of Aggregate Output, the Price Level, and the Interest Rate Copyright 2017 Pearson Education, Inc. 11-1 Copyright 11-2 Chapter
More informationMoney and the Economy CHAPTER
Money and the Economy 14 CHAPTER Money and the Price Level Classical economists believed that changes in the money supply affect the price level in the economy. Their position was based on the equation
More informationEC202 Macroeconomics
EC202 Macroeconomics Koç University, Summer 2014 by Arhan Ertan Study Questions - 3 1. Suppose a government is able to permanently reduce its budget deficit. Use the Solow growth model of Chapter 9 to
More informationMacroeconomic Analysis Econ 6022
1 / 36 Macroeconomic Analysis Econ 6022 Lecture 10 Fall, 2011 2 / 36 Overview The essence of the Keynesian Theory - Real-Wage Rigidity - Price Stickiness Justification of these two key assumptions Monetary
More informationSolutions to PSet 5. October 6, More on the AS/AD Model
Solutions to PSet 5 October 6, 207 More on the AS/AD Model. If there is a zero interest rate lower bound, is fiscal policy more or less effective than otherwise? Explain using the AS/AD model. Is the United
More informationVII. Short-Run Economic Fluctuations
Macroeconomic Theory Lecture Notes VII. Short-Run Economic Fluctuations University of Miami December 1, 2017 1 Outline Business Cycle Facts IS-LM Model AD-AS Model 2 Outline Business Cycle Facts IS-LM
More information