Session 12. Aggregate Supply: The Phillips curve. Credibility

Size: px
Start display at page:

Download "Session 12. Aggregate Supply: The Phillips curve. Credibility"

Transcription

1 Session 12. Aggregate Supply: The Phillips curve. Credibility v Potential Output and v Okun s law v The Role of Expectations and the Phillips Curve v Oil Prices and v US Monetary Policy and World Real interest rate Potential output and inflation Changes in the economic environment lead to changes in demand. In the short run demand determines output. If demand is below potential, the economy is in a recession, if demand is above potential the economy is in an expansion. Long-run aggregate supply Recession Overheating Y potential Output 1

2 Okun s Law, or How to Estimate Potential Output? v Estimates of potential output can be done by measuring the factors of production (capital, labor) and their productivity. v A simpler (although not as accurate) approach to estimating potential output is to use the Okun s law. The Okun s law is an empirical regularity that postulates a relationship between unemployment and the output gap. Okun s law in the US: and Using the relationship between the output gap and unemployment (Okun s Law) we can think about the relationship between unemployment, as a measure of slack in the economy, and inflation (the Phillips Curve). Overheating and increasing inflation Recession and Decreasing Phillips Curve (short run) Natural Rate of = Full Employment 2

3 and : US in the 1960s and : (US)

4 and : and v The Phillips curve is anchored by two long-run parameters: the natural rate of unemployment and the inflation targeted by the central bank. If they change, the curve shifts. v The only reason why sometimes there is a negative relationship between inflation and unemployment is because there is change in regime and it takes time for inflation to change. There is, therefore, an element of surprise in this negative relationship. Expectations and Credibility are crucial v Example: Anticipated Expansionary Monetary Policy Money supply growing at a 10% rate for a while Firms expect this to continue for the next year => Firms increase prices by 10% today; no effect on output or employment 4

5 Disinflation: Trading off and 12.1% In 1979/1980 the newly elected chairman of the U.S. Federal Reserve, sets as a goal to bring inflation below 4%. Tight monetary policy will be the tool to achieve this low inflation. The consequence is high unemployment for several years 5.4% 3.3% Phillips Curve (short run) Natural Rate of (6%) 7.2% 7.1% 9.7% The Role of Expectations v What makes unemployment go down from 1983 to 1985 without increasing inflation? v From 1980 to 1983 the decrease in inflation has effects on relative (real) prices because v Contracts are written in nominal terms (e.g. wages) and are not modifiable in the short run v Even if contracts get changed, expectations (forecasts) of inflation take time to adjust. The length depends on the credibility of the policy maker. v After 1983, policy becomes credible and contracts adjust. This adjustment gets reflected in lower unemployment and a return to potential (trend) output. v Notice that the economy does not return to its original position because inflation will now be lower forever (until the next change in policy) 5

6 and Phillips Curve (long run) Every short run Phillips curve corresponds to specific inflation target (which is credible). target (expected ) Phillips Curve (short run) Natural Rate of and Phillips Curve (long run) Target Phillips Curve (short run) New Target Decrease in expected inflation Natural Rate of 6

7 The Cost of Reducing The impact of low inflation on growth? But even those who concede that New Zealand's performance in keeping inflation low and stable has been good often argue that the cost of achieving this, in terms of economic growth and employment foregone, has been too high, and that perhaps something more moderate, or "less obsessive" in the words of some of our critics, would have been more desirable. There is not much doubt that the process of reducing inflation from around 15 per cent per annum in the mid-eighties to below 2 per cent in 1991 had an adverse impact on growth and employment during that period. I have often acknowledged that point, and indeed I know of no central banker who would claim with any confidence that inflation can be reduced from a high level to a low level without at least some, temporary, impact on growth and employment. The reasons for this are now widely understood and relate to the way in which a policy to reduce inflation interacts with expectations that inflation will continue at its previous pace. But shortly after inflation was first reduced to the 0 to 2 per cent target in 1991, the economy began to grow again and unemployment began to fall. Donald T Brash, Governor of the Reserve Bank of New Zealand (February 2000) The Cost of Reducing As a result, if inflation accelerates to higher levels as it did during and , tighter monetary policy (higher interest rates) would be needed to bring inflation down again, and that such tightening is initially likely to be accompanied by slower economic growth and concomitantly rising unemployment. A shortrun pain for a long-run gain! Dr Monde Mnyande, Chief Economist, South African Reserve Bank (Central Bank), January 28,

8 The Role of Expectations One of the key characteristics of the expectations formation process is the level of inertia. There is a significant inertia in expectations. In particular, one can look at the persistence in economic forecasts around the point where policy is reversed. Anchoring of Expectations is Linked to Credibility A credible central bank anchors inflation expectations in a way that temporary changes in inflation do not translate into wage and price decisions by workers and firms. Euro area inflation forecasts 8

9 Anchoring of Expectations is Linked to Credibility A comparison of inflation rates of goods with flexible prices and those with sticky prices in the US shows that since the early 80 s inflation expectations are much more anchored (i.e. temporary changes in inflation do not change medium-term expectations of inflation because the public believes that inflation will go back to normal) Annual M1 1972M1 1976M1 1980M1 1984M1 1988M1 1992M1 1996M1 2000M1 2004M1 2008M Flexible Sticky Core Versus Headline Another way to think about credibility of long-term expectations is to look at the volatility of core inflation (excluding volatile items). Core inflation is a good measure of long-term inflation. Headline inflation (includes all items) fluctuates around core inflation Annual Core Headline 9

10 Management of Expectations In the last years and as a result of falling inflation expectations, a series of statements by the Chairman of the Federal Reserve as well as different rounds of quantitative easing and Operation Twist brought inflation expectations back to normal. Building credibility, anchoring inflation expectations and avoiding political interference in central bank decisions To minimize the impact of politicians on monetary policy policy, many economists have suggested two alternatives: Policy conducted by rule: Policymakers announce in advance how policy will respond in various situations, and commit themselves to following through. Examples: constant money growth, fixed exchange rate (monetary policy), balanced budget amendment, 3% limits on budget deficits (fiscal policy). Policy conducted by independent institutions: Allow for discretion but remove the decision from those who have the wrong incentives. This is today the case for most central banks in advanced economies and in a growing number of emerging markets. Is fiscal policy next? 10

11 Central Bank Independence Giving independence to central banks has proven to be the best way to keep inflation low and stable. Average inflation Spain New Zealand Italy United Kingdom Australia Denmark France/Norway/Sweden 5 4 Belgium J apan Canada Ne therlands United States 3 S witzerl and Ge rmany Source: See Alesina and Summers (1993) Index of central bank independence What about oil prices? Aren t they a cause of inflation? In 1973 and 1979 the price of oil grew by about 60% and put upward pressure on prices in countries that were dependent on oil as a source of energy Price of Oiil (nominal) Oil Price (annual %) Price of Oil Oil Price 11

12 Stagflation and Oil Price shocks Although all countries faced the same increase in the price of oil. behaved very differently depending on the response of monetary policy Germany Japan United Kingdom United States Stagflation and Oil Price shocks The differences in the response of monetary policy did not result in significant differences in GDP growth rates. Some of the countries that let inflation go up by a larger amount then had to deal with deeper recessions when inflation had to be brought back to normal levels (as in the case of the United Kingdom). 10 Real GDP Growth Germany Japan United Kingdom United States 12

13 Relative versus Absolute Prices v There are two goods in the world Oil and Computers. The relative price of each of them is determined by the pace of technological progress in each of the two sectors. Because of fast technological progress in computers we see price of oil expressed in terms of computers will increase over the coming years. v Their ABSOLUTE price and how fast it changes is determined by monetary policy. v Assume equal weight for both of them. An inflation of 2% can be achieved with v 25% increase in the price of oil and -21% fall in computers prices or v 12% increase in the price of oil and -8% fall in computers prices. US Monetary Policy and World Is the US Federal Reserve policy responsible for inflation in other countries? The most important development globally is that the world is growing more quickly, particularly in emerging markets, Bernanke said in response to a question after his speech at the National Press Club... I think it s entirely unfair to attribute excess demand in emerging markets to U.S. monetary policy, Bernanke said. Those nations can use their own monetary policy and adjust exchange rates to deal with their inflation problems, he said. It s really up to emerging markets to find appropriate tools to balance their own growth. February

14 Session 12. Summary v In the short run, there is a trade off between inflation and unemployment. The big lesson from the 1970s is that there is no permanent trade-off between inflation and unemployment. Any attempt to exploit the short-run relationship will change expectations of inflation and force the economy to return back to equilibrium. v The management of inflation expectations is key to monetary policy. v To ensure that policies are not abused by politicians, several countries have required that monetary policy be conducted by rules and the central bank be given legal independence from the government. Appendix: Stagflation and Oil Price shocks 1. We can think about an oil price shock as a shift of the long-run aggregate supply to the left. Long-run aggregate supply Real interest rate Equilibrium Real interest rate IS LM 2. What are the policy options? Y LR Output 14

Inflation, Unemployment, and Federal Reserve Policy

Inflation, Unemployment, and Federal Reserve Policy Chapter 16 (28) Inflation, Unemployment, and Federal Reserve Policy Chapter Summary Inflation and unemployment are two very important macroeconomic issues. The Phillips curve illustrates the short-run

More information

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis. 22.

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis. 22. Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 22 Aggregate Demand and Supply Analysis 22.1 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economy's A)

More information

THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT

THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 21 THE SHORT-RUN TRDEOFF ETWEEN INFLTION ND UNEMPLOYMENT LERNING OJECTIVES: y the end of this chapter, students should understand: why policymakers face a short-run tradeoff between inflation and unemployment.

More information

Module 29(65) The AD AS Model. Module Objectives. Module Outline. I. The AD AS Model

Module 29(65) The AD AS Model. Module Objectives. Module Outline. I. The AD AS Model Module 29(65) The AS Model Module Objectives What students will learn: The difference between short-run and long-run macroeconomic equilibrium The causes and effects of demand shocks and supply shocks

More information

Chapter 12: Aggregate Supply and Phillips Curve

Chapter 12: Aggregate Supply and Phillips Curve Chapter 12: Aggregate Supply and Phillips Curve In this chapter we explain the position and slope of the short run aggregate supply (SRAS) curve. SRAS curve can also be relabeled as Phillips curve. A basic

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

Chapter 12 Unemployment and Inflation

Chapter 12 Unemployment and Inflation Chapter 12 Unemployment and Inflation Multiple Choice Questions 1. The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by (a) A.W. Phillips. (b) Edmund Phelps. (c)

More information

Economics Revision: Conflicts between Macro Objectives

Economics Revision: Conflicts between Macro Objectives Economics Revision: Conflicts between Macro Objectives This revision note looks at possible conflicts between macroeconomic objectives and some of the policy prescriptions for over- coming them. hen conflicts

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

Chapter 16: Inflation, Unemployment, and Federal Reserve Policy

Chapter 16: Inflation, Unemployment, and Federal Reserve Policy Chapter 16: Inflation, Unemployment, and Federal Reserve Policy Yulei Luo SEF of HKU April 16, 2012 Learning Objectives 1. Describe the Phillips curve and the nature of the short-run trade-off between

More information

CH 10 - REVIEW QUESTIONS

CH 10 - REVIEW QUESTIONS CH 10 - REVIEW QUESTIONS 1. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the

More information

Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique

Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique 1.The aggregate demand curve shows the relationship between inflation and: A) the nominal interest rate. D) the exchange rate. B) the real interest rate. E) short-run equilibrium output. C) the unemployment

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Inflation can be started by 1) A) an increase in aggregate supply or a decrease in aggregate

More information

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian Model The Keynesian Theory of Business

More information

Effects of Inflation Unanticipated Inflation in the Labor Market

Effects of Inflation Unanticipated Inflation in the Labor Market Effects of Inflation Unanticipated Inflation in the Labor Market Unanticipated inflation has two main consequences in the labor market: Redistribution of income Departure from full employment Effects of

More information

Agenda. Unemployment and Inflation, Part 1. Unemployment and Inflation. Unemployment and Inflation. Unemployment and Inflation:

Agenda. Unemployment and Inflation, Part 1. Unemployment and Inflation. Unemployment and Inflation. Unemployment and Inflation: Agenda Unemployment and Inflation, Part 1 : Is There a Trade-Off? 15-1 15-2 Is there a trade-off between inflation and unemployment? In 1958, A.W. Phillips found a negative relationship between unemployment

More information

Chapter 17: Inflation, Unemployment, and Federal Reserve Policy

Chapter 17: Inflation, Unemployment, and Federal Reserve Policy Chapter 17: Inflation, Unemployment, and Federal Reserve Policy Yulei Luo SEF of HKU April 29, 2013 Learning Objectives 1. Describe the Phillips curve and the nature of the short-run trade-off between

More information

MACROECONOMICS. Ayşe S. ÇAĞLI

MACROECONOMICS. Ayşe S. ÇAĞLI MACROECONOMICS Ayşe S. ÇAĞLI aysecagli@beykent.edu.tr 1 INFLATION and UNEMPLOYMENT PHILLIPS CURVE 2 Phillips curve Many people think there is a trade-off between inflation and unemployment. The idea originated

More information

Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D.

Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D. Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D. Aggregate Demand and Aggregate Supply Economic fluctuations, also called business cycles, are movements of GDP away from potential

More information

150 points. Please write answers in ink. Allocate your time efficiently. Good luck.

150 points. Please write answers in ink. Allocate your time efficiently. Good luck. Eco 202 Name Final Exam Key 10 May 2004 150 points. Please write answers in ink. Allocate your time efficiently. Good luck. 1. Suppose that Congress passes an investment tax credit, which subsidizes domestic

More information

Chapter 12. Unemployment and Inflation. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 12. Unemployment and Inflation. 2008 Pearson Addison-Wesley. All rights reserved Chapter 12 Unemployment and Inflation Chapter Outline Unemployment and Inflation: Is There a Trade-Off? The Problem of Unemployment The Problem of Inflation 12-2 Unemployment and Inflation: Is There a

More information

Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply Demand and Supply Chapter 31 Copyright 21 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College

More information

Suggested Answers for Mankiw Questions for Review & Problems

Suggested Answers for Mankiw Questions for Review & Problems Suggested Answers for Mankiw & Problems The answers here will not have graphs, I encourage to refer to the text for graphs. There is a some math, however I don t expect you to replicate these in your exam,

More information

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.6 Aggregate Supply, Wages, rices, and Unemployment I. Introduction A. The dynamic changes of and the price adjustment B. Link between the price change

More information

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve Chapter 12 Monetary Policy and the Phillips Curve By Charles I. Jones Media Slides Created By Dave Brown Penn State University The short-run model summary: Through the MP curve the nominal interest rate

More information

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results

More information

Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

More information

MACROECONOMICS SECTION

MACROECONOMICS SECTION MACROECONOMICS SECTION Directions: Answer both parts, A and B; there is some choice in each part. Points will be proportional to the time limits indicated. Part A Short Answer Choose two (2) of the following.

More information

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth

The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth The session previously discussed important variables such as inflation, unemployment and GDP. We also alluded to factors that cause economic growth enabling us to produce more and more to achieve higher

More information

In ation and Unemployment. Chapter 12

In ation and Unemployment. Chapter 12 In ation and Unemployment Chapter 12 1. Costs of in ation 2. Costs of unemployment 3. Relationship between in ation and unemployment 4. Reducing in ation 5. Reducing the natural rate of unemployment 1

More information

Chapter 8 Business Cycles

Chapter 8 Business Cycles Chapter 8 Business Cycles Multiple Choice Questions 1. One of the first organizations to investigate the business cycle was (a) the Federal Reserve System. (b) the National Bureau of Economic Research.

More information

Chapter 13: Aggregate Demand and Aggregate Supply Analysis

Chapter 13: Aggregate Demand and Aggregate Supply Analysis Chapter 13: Aggregate Demand and Aggregate Supply Analysis Yulei Luo SEF of HKU March 25, 2013 Learning Objectives 1. Identify the determinants of aggregate demand and distinguish between a movement along

More information

Practiced Questions. Chapter 20

Practiced Questions. Chapter 20 Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution

More information

Chapter 3 AGGREGATE DEMAND AND

Chapter 3 AGGREGATE DEMAND AND Chapter 3 AGGREGATE DEMAND AND AGGREGATE G SULY Dr. Mohammed Alwosabi The aggregate demand and aggregate supply (-AS) model determines RGD and GD Deflator and helps us understand the performance of three

More information

chapter: Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58

chapter: Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58 chapter: 12 >> Aggregate Demand and Aggregate Supply Krugman/Wells 2009 Worth Publishers 1 of 58 WHAT YOU WILL LEARN IN THIS CHAPTER How the aggregate demand curve illustrates the relationship between

More information

Macroeconomics, 6e (Abel et al.) Chapter 12 Unemployment and Inflation Unemployment and Inflation: Is There a Trade-off?

Macroeconomics, 6e (Abel et al.) Chapter 12 Unemployment and Inflation Unemployment and Inflation: Is There a Trade-off? Macroeconomics, 6e (Abel et al.) Chapter 12 Unemployment and Inflation 12.1 Unemployment and Inflation: Is There a Trade-off? 2) Phillipsʹs research looked at British data on A) unemployment and inflation.

More information

LECTURE 8: Inflation and unemployment: 1. The Long run Phillips Curve. 2. The Short run Phillips Curve. 5. A "historical" note on the Phillips Curve

LECTURE 8: Inflation and unemployment: 1. The Long run Phillips Curve. 2. The Short run Phillips Curve. 5. A historical note on the Phillips Curve MACROECONOMICS LECTURE 8: Inflation and unemployment: Read: Blanchard Ch. 8. Topics: 1. The Long run Phillips Curve 2. The Short run Phillips Curve 3. The SRAS and the SRPC 4. Policy effects 5. A "historical"

More information

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian 2008 Pearson Addison-Wesley. All rights

More information

Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis

Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Multiple Choice Questions 1. The FE line shows the level of output at which the market is in equilibrium. (a) Goods (b) Asset

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 3312 Macroeconomics Practice Exam 3 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Assuming the economy is starting at the natural rate

More information

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY

VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY VII. ECONOMIC FLUCTUATIONS AND MACROECONOMIC POLICY A. Aggregate Demand and Prices 1. The aggregate demand/inflation (ADI) curve -- graphical representation of the negative relationship (downward sloping

More information

Macroeconomics CHAPTER 10. Aggregate Supply and Aggregate Demand. Aggregate Supply. The Short-Run Aggregate Supply Curve

Macroeconomics CHAPTER 10. Aggregate Supply and Aggregate Demand. Aggregate Supply. The Short-Run Aggregate Supply Curve Aggregate Supply Macroeconomics CHAPTER 10 The aggregate supply curve shows the relationship aggregate output. Aggregate Supply and Aggregate Demand 3 What you will learn in this chapter: How the aggregate

More information

Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0

Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0 22 The Short-Run Trade-off Between Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0 In this chapter, look for the answers to these questions: How are inflation and unemployment related in

More information

Foundations of Economics for International Business Supplementary Exercises 7

Foundations of Economics for International Business Supplementary Exercises 7 Foundations of Economics for International Business Supplementary Exercises 7 INSTRUCTOR: XIN TANG Department of World Economics Economics and Management School Wuhan University Fall 2015 1 MULTIPLE CHOICES

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

More information

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 3312 Macroeconomics Exam 3 Fall 2014 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Everything else held constant, an increase in net

More information

Chapter 12 Aggregate Supply and Aggregate Demand

Chapter 12 Aggregate Supply and Aggregate Demand Chapter 12 Aggregate Supply and Aggregate Demand After reading Chapter 12, AGGREGATE SUPPLY AND AGGREGATE DEMAND, you should be able to: Use an Aggregate Demand and Aggregate Supply model to explain output,

More information

10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y

10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y Facts about the business cycle Chapter 9: GD growth averages 3 3.5 percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GD, but consumption

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions, each 1.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions, each 1. AUBG ECO 302 A F I N A L E X A M Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 35 questions, each 1.5 points 1) The Bigdrill company drills

More information

Aggregate Demand and Aggregate Supply Analysis

Aggregate Demand and Aggregate Supply Analysis Aggregate Demand and Aggregate Supply Analysis This lecture develops an aggregate demand and aggregate supply model to study the effects of monetary policy on output and inflation. Aggregate Supply A.

More information

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 3. Disequilibrium in the AD-AS model

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 3. Disequilibrium in the AD-AS model Agenda The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, art 3 rice Adjustment and the Attainment of General Equilibrium 13-1 13-2 General equilibrium in the AD-AS model Disequilibrium

More information

ECN 106 Macroeconomics 1. Lecture 6

ECN 106 Macroeconomics 1. Lecture 6 ECN 106 Macroeconomics 1 Lecture 6 Giulio Fella c Giulio Fella, 12 ECN 106 Macroeconomics 1 - Lecture 6 140/311 Roadmap for this lecture Policy implications of the long-run model Macroeconomic stylized

More information

Chapter 25. Rational Expectations: Implications for Policy The Lucas Critique of Policy Evaluation

Chapter 25. Rational Expectations: Implications for Policy The Lucas Critique of Policy Evaluation Chapter 25 Rational Expectations: Implications for Policy 25.1 The Lucas Critique of Policy Evaluation 1) Whether one views the activist policies of the 1960s and 1970s as destabilizing or believes the

More information

6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 6 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity

Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Multiple Choice Questions 1. Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between

More information

Monetary and Fiscal Policy in the ISLM Model

Monetary and Fiscal Policy in the ISLM Model WEB CHAPTER 2 Preview Monetary and Fiscal Policy in the ISLM Model S ince World War II, government policymakers have tried to promote high employment without causing inflation. If the economy experiences

More information

1. Neutrality of money in classical model: brief characteristic, implication for economic policy

1. Neutrality of money in classical model: brief characteristic, implication for economic policy Economic policy, examination questions, school year 2010-2011 A. Questions, where brief, compact answer is required 1. Neutrality of money in classical model: brief characteristic, implication for economic

More information

2. According to the dynamic AD Curve, if M + v = 7%, while real growth = 2%, what must inflation be equal to?

2. According to the dynamic AD Curve, if M + v = 7%, while real growth = 2%, what must inflation be equal to? Homework 11 1. In economic terms, menu costs are A. the cost of services listed in a menu. B. the costs to producer of changing prices. C. the cost of goods listed on a business rate sheet. D. the price

More information

Aggregate Demand and Aggregate Suppy

Aggregate Demand and Aggregate Suppy chapter 12 (28) Demand and Suppy Chapter Objectives Students will learn in this chapter: How the aggregate demand curve illustrates the relationship between the aggregate and the quantity of aggregate

More information

Macroeconomic Analysis Econ 6022 Level I

Macroeconomic Analysis Econ 6022 Level I 1 / 66 Macroeconomic Analysis Econ 6022 Level I Lecture 8 Fall, 2011 2 / 66 Business Cycle Analysis: A Preview What explains business cycle fluctuations? Two major business cycle theories - Classical theory

More information

Lecture 10: Aggregate Demand and Aggregate Supply I

Lecture 10: Aggregate Demand and Aggregate Supply I EC201 Intermediate Macroeconomics EC201 Intermediate Macroeconomics Lecture 10: Aggregate Demand and Aggregate Supply I Lecture Outline: - how to derive the aggregate demand from the IS-LM model; - a preliminary

More information

Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions:

Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions: 33 Aggregate Demand and Aggregate Supply R I N C I L E S O F ECONOMICS FOURTH EDITION N. GREGOR MANKIW Long run v.s. short run Long run growth: what determines long-run output (and the related employment

More information

2W EB CHAPTER. Since World War II, government policymakers have tried to promote high employment. Preview. ISLM Model

2W EB CHAPTER. Since World War II, government policymakers have tried to promote high employment. Preview. ISLM Model 2W EB CHAPTER Monetary and Fiscal Policy in the ISLM Model Preview Since World War II, government policymakers have tried to promote high employment without causing inflation. If the economy experiences

More information

Mods Practice

Mods Practice Mods 17-18-19 Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The aggregate demand curve shows the relationship between the aggregate price level

More information

Name: Final Exam Econ 219 Spring You can skip one multiple choice question. Indicate clearly which one

Name: Final Exam Econ 219 Spring You can skip one multiple choice question. Indicate clearly which one Name: Final Exam Econ 219 Spring 2005 This is a closed book exam. You are required to abide all the rules of the Student Conduct Code of the University of Connecticut. You can skip one multiple choice

More information

Aggregate Demand and Aggregate Supply Analysis

Aggregate Demand and Aggregate Supply Analysis Chapter 12 (24) Aggregate Demand and Aggregate Supply Analysis Chapter Summary During most years, prices rise (we have inflation) and real GDP increases (we have economic growth). The equilibrium level

More information

Problem Set 4. We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly.

Problem Set 4. We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly. Problem Set 4 Question 2 We are asked to label each of the seven statements as true, false or uncertain and to justify our answers briefly. (a) The aggregate supply relation implies that an increase in

More information

Tutor2u Economics Essay Plans Summer 2002

Tutor2u Economics Essay Plans Summer 2002 Macroeconomics Revision Essay Plan (2): Inflation and Unemployment and Economic Policy (a) Explain why it is considered important to control inflation (20 marks) (b) Discuss how a government s commitment

More information

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL

THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL THE AGGREGATE DEMAND AGGREGATE SUPPLY MODEL Previously The original Solow model focused on capital investment as the main source of economic growth. Modern growth theory now recognizes that institutions

More information

Inflation Dynamics and Unemployment Rate in the Philippines By Faith Christian Q. Cacnio 1

Inflation Dynamics and Unemployment Rate in the Philippines By Faith Christian Q. Cacnio 1 No. 12-02 Mar-Apr 2012 Inflation Dynamics and Unemployment Rate in the Philippines By Faith Christian Q. Cacnio 1 T he months of March and April are traditionally known as graduation months in the Philippines.

More information

Chapter 22. Aggregate Demand and Supply Analysis Aggregate Demand

Chapter 22. Aggregate Demand and Supply Analysis Aggregate Demand Chapter 22 Aggregate Demand and Supply Analysis 22.1 Aggregate Demand 1) The aggregate demand curve is the total quantity of an economyʹs A) intermediate goods demanded at all price levels. B) intermediate

More information

Is the Australian economy heading for a severe recession? If so, what (if anything) can policy makers do about it?

Is the Australian economy heading for a severe recession? If so, what (if anything) can policy makers do about it? Is the Australian economy heading for a severe recession? If so, what (if anything) can policy makers do about it? Christopher M. Fleming Department of Accounting, Finance and Economics GriffithBUSINESS

More information

Agenda. Introduction to Macroeconomics. What Macroeconomics Is About. What Macroeconomics Is About. What Macroeconomics Is About.

Agenda. Introduction to Macroeconomics. What Macroeconomics Is About. What Macroeconomics Is About. What Macroeconomics Is About. Agenda. Introduction to Macroeconomics What Macroeconomists Do.. 1-1 1-2 Macroeconomics is the study of: 1. The structure, dynamic adjustment, and performance of national economies, and 2. The government

More information

Economics II (macroeconomics)

Economics II (macroeconomics) Course: Economics II (macroeconomics) Chapter 5 5.2 Labor Market, Unemployment and the Phillips Curve, Part II Author: Ing. Vendula Hynková, Ph.D. Introduction The aim of this chapter is to explain original

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Aggregate Supply and Aggregate Demand

Aggregate Supply and Aggregate Demand Aggregate Supply and Aggregate Demand Chapter CHAPTER CHECKLIST Define and explain the influences on aggregate supply. Aggregate supply is the output from all firms. Other things remaining the same, the

More information

Solution. Solution. Monetary Policy. macroeconomics. economics

Solution. Solution. Monetary Policy. macroeconomics. economics KrugmanMacro_SM_Ch14.qxp 10/27/05 3:25 PM Page 165 Monetary Policy 1. Go to the FOMC page of the Federal Reserve Board s website (http://www. federalreserve.gov/fomc/) to find the statement issued after

More information

The Short-Run Tradeoff between Inflation and Unemployment

The Short-Run Tradeoff between Inflation and Unemployment The Short-Run Tradeoff between and Chapter 33 Copyright 1 by Harcourt, Inc. ll rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

More information

The Short-Run Trade-off between Inflation and Unemployment

The Short-Run Trade-off between Inflation and Unemployment HPTER 35 The Short-Run Trade-off between Inflation and Goals in this chapter you will Learn why policymakers face a short-run trade-off between infl ation and unemployment onsider why the infl ation-unemployment

More information

Lecture 6: Economic Fluctuations. Rob Godby University of Wyoming

Lecture 6: Economic Fluctuations. Rob Godby University of Wyoming Lecture 6: 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 information

DEFLATION. Martin Feldstein * When Andrew Crockett called about 10 days ago and invited me to make these remarks, he

DEFLATION. Martin Feldstein * When Andrew Crockett called about 10 days ago and invited me to make these remarks, he DEFLATION Martin Feldstein * Thank you. I am pleased to be here and honored by the opportunity to talk to this distinguished group. When Andrew Crockett called about 10 days ago and invited me to make

More information

Econ 102 Homework #9 AD/AS and The Phillips Curve

Econ 102 Homework #9 AD/AS and The Phillips Curve Econ 102 Homework #9 D/S and The Phillips Curve 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, D/S

More information

Economics 101 Multiple Choice Questions for Final Examination Miller

Economics 101 Multiple Choice Questions for Final Examination Miller Economics 101 Multiple Choice Questions for Final Examination Miller PLEASE DO NOT WRITE ON THIS EXAMINATION FORM. 1. Which of the following statements is correct? a. Real GDP is the total market value

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Aggregate Supply Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply Topic: Aggregate Supply/Aggregate Demand Model 1) The aggregate supply/aggregate demand model is used to help understand all of the following

More information

CHAPTER 9 Introduction to Economic Fluctuations

CHAPTER 9 Introduction to Economic Fluctuations HTER 9 Introduction to Economic Fluctuations Questions for Review 1. The price of a magazine is an example of a price that is sticky in the short run and flexible in the long run. Economists do not have

More information

Introduction and Overview

Introduction and Overview 1 Introduction and Overview When I was young I thought that money was the most important thing in life. Now that I am old, I know it is. Oscar Wilde More and more of the world s currencies have floated

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Sample Questions for Chapters 12 & 13 Inflation Unemployment & Business Cycles Fiscal Policy MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Inflation

More information

Questions for Review. CHAPTER 9 Introduction to Economic Fluctuations

Questions for Review. CHAPTER 9 Introduction to Economic Fluctuations HTER 9 Introduction to Economic Fluctuations Questions for Review 1. When GD declines during a recession, growth in real consumption and investment spending both decline; unemployment rises sharply. 2.

More information

2. a. The IS curve is found from the equation Y = Cd + P + G = (Y - 100) - 500r r+ 100, or 0.5Y = r, or Y = r.

2. a. The IS curve is found from the equation Y = Cd + P + G = (Y - 100) - 500r r+ 100, or 0.5Y = r, or Y = r. Chapter 11 Numerical Problems 1. The following table shows the real wage (w), the effort level (E), and the effort per unit of real wages (E / w). w E E/w 8 7 0.875 10 10 1.00 12 15 1.25 14 17 1.21 16

More information

What causes the business cycle? Why did U.S. economy go into recession in 2008?

What causes the business cycle? Why did U.S. economy go into recession in 2008? What causes the business cycle? Why did U.S. economy go into recession in 2008? Aggregate Supply and 13 Aggregate Demand When you have completed your study of this chapter, you will be able to CHAPTER

More information

Chapter 25. Questions

Chapter 25. Questions Chapter 25 Questions 4. Expansionary gaps tend to raise inflation, and recessionary gaps tend to reduce it. If an expansionary gap exists, for example, firms are producing above normal capacity. Eventually

More information

The following text represents the notes on which Mr. Parry based his remarks. 1998: Issues in Monetary Policymaking

The following text represents the notes on which Mr. Parry based his remarks. 1998: Issues in Monetary Policymaking Phoenix Society of Financial Analysts and Arizona State University Business School ASU, Memorial Union - Ventana Room April 24, 1998, 12:30 PM Robert T. Parry, President, FRBSF The following text represents

More information

Inflation, Unemployment and Monetary Policy

Inflation, Unemployment and Monetary Policy San Francisco State University Michael Bar Inflation, Unemployment and Monetary Policy 1 Introduction Inflation and unemployment are both considered undesirable for an economy. Why is inflation bad? High

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

More information

Do Commodity Price Spikes Cause Long-Term Inflation?

Do Commodity Price Spikes Cause Long-Term Inflation? No. 11-1 Do Commodity Price Spikes Cause Long-Term Inflation? Geoffrey M.B. Tootell Abstract: This public policy brief examines the relationship between trend inflation and commodity price increases and

More information

LECTURE 18: Should Policy Makers be restrained?

LECTURE 18: Should Policy Makers be restrained? Dr. Odile Poulsen Aarhus Business School Department of Economics MACROECONOMICS LECTURE 18: Should Policy Makers be restrained? Read: Blanchard Ch.25. Topics: 1.Uncertainty and Policy. 2. Expectations

More information

Chapter 22. Aggregate Demand and Supply Analysis

Chapter 22. Aggregate Demand and Supply Analysis Chapter 22 Aggregate Demand and Supply Analysis Aggregate Demand The relationship between the quantity of aggregate output demanded and the price level when all other variables are held constant Based

More information

Econ 202 Final Exam. Douglas, Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 202 Final Exam. Douglas, Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. , Spring 2010 May 6, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam Multiple Choice. 2 points each. 1. According to the long-run

More information

2009 CHAPTER 11 Self Study Questions

2009 CHAPTER 11 Self Study Questions CHAPTER 11 Self Study Questions 1) The aggregate supply/aggregate demand model is used to help understand all of the following except A) inflation. B) business cycle fluctuations. C) the aggregate value

More information

Objectives for Chapter 9 Aggregate Demand and Aggregate Supply

Objectives for Chapter 9 Aggregate Demand and Aggregate Supply 1 Objectives for Chapter 9 Aggregate Demand and Aggregate Supply At the end of Chapter 9, you will be able to answer the following: 1. Explain what is meant by aggregate demand? 2. Name the four categories

More information