Download - Inflation, unemployment, business cycle
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Inflation, unemployment, Business CycleMicroeconomic FoundationAlaleh Mani2011
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Quick Review
Real GDP
Inflati
on,
Pri
ce level, G
DP d
eflato
r
LAS0
LAS0
1.TechnologyEconomic Growth: 2.Capital Accumulation 3. Labor Growth
Inflation: AD:AD Speed up Potential GDP, Quantity of moneyASA: Oil PriceExpectation: E(Inflation) push AD right
Business
Cycle
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Inflation Three different monetary phenomenon cause inflation: 1.Demand Pull Inflation:
1. Interest rate Fall Investment Rise( CFA EXAM 2009)2. Tax Fall Consumption and Investment Rise3. Quantity of Money rise interest rate fall investment rise4. Export rise5. Import Fall
2.Cost push Inflation:6. 1.Money wage rate increase7. 2.Natural resource price rise
3.Expectation of InflationIt is a theory of quantity of Money: Consumption will rise due to
expectation AD rise
Cost of Factor of production rise
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Demand Pull Inflation1. Interest rate Fall Investment Rise( CFA EXAM 2009)2. Tax Fall Consumption and Investment Rise3. Quantity of Money rise(Fed Buy back bond) (exam 2009) interest
rate fall investment rise4. Export rise5. Import Fall
Unemployment<Natural
Money wage rate :
Supply cost rise
One time rise in the price level does not mean inflation
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Demand Pull rise process
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Cost Push Inflation1. Money wage rate increase2. Natural resource price rise
One time rise in the price level does not mean inflation
Unemployment>Natural
Fed cuts Tax to calm down the outrageAnd fight against STAGFLATION
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Cost Push Rise process
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Expected Inflation In expect of rise of AD, money wage rise at same pace If expectation is based on relevant information it is
rational expectation
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Phillips Curve To simplify the AS AD movement To depict short run inflation To see actual inflation and E(inflation) The relation between unemployment and
inflation AS talks about price level(inflation) and
GDP(labor force production)Phillips curve derive from AS
E(inflation rate) and natural unemployment=constant
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SRPC
Unemployment < natural unemployment rate
Unemployment > natural unemployment rate
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LRPCExp
ecta
tion
ch
an
ge
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PC movement
Increase in natural UNEMPLOYMENT: labor population The whole system moves
natu
ral u
nem
plo
ym
en
t 1
natu
ral u
nem
plo
ym
en
t 2
Expectation =fix
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Business Cycle
Real GDP
Inflati
on,
Pri
ce level, G
DP d
eflato
r
LAS0LAS0
Economic Growth and EXPANSION:
Mainstream Business cycle theory
Different speed cause fluctuation in AD
lead to Business Cycle
AD
AD
AD
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Business Cycle Keynesian: AD moved by Investor confidence Monetarist: AD moved by Quantity of money New classical: AD moved by expectation of inflation New Keynesian: Consider money wage rate on SAS
movement as well Real Business Cycle: R&D Pulse in new technology Productivity after a
lag LAS growsLag caused by low skilled worker that need time to
adapt with technology this lag make a reverse movement of AD and AS at fist and cause cycles