Chapter 16 Flashcards
very high inflation is always associated with:
rapid increases in the money supply
classical model of the price level
the real quantity of money is always at its long-run equilibrium level
- analyzed as if both long run and short run aggregate supply curves are vertical
- this is a poor asumption during periods of low inflation (where there is an upward sloping SRAS curve)
- classical model is a good approximation for economies that experience persistantly high inflation
in countries with persistantly high inflation:
changes in the money supply are quickly translated into changes in the inflation rate
- classical model is a good approximation (SRAS curve is steep/vertical)
Seignorage
the revenue granted by the governments right to print money
- accounts for less than 1% of gov. budget
the fed is concerned about:
inflation and unemployment
(not revenue)
printing money to cover a budget defecit leads to:
inflation
(increase in aggregate price level)
inflation tax
the reduction in the value of money held by the public caused by inflation
when inflation is high:
- people will avoid holding money
- buy goods that last over time or assets that hold their value (like gold)
potential output
the level of real GDP that the economy would produce once all prices had fully adjusted
-grows steadily over time, reflecting long-run growth
acutal aggregate output in the short run
fluctuates around potential output
output gap
percentage of difference between the actual level of real GDP and potential output
inflationary = output is more than potential
recessionary - output is less than potential
unemployment rate
cyclical + natural unemployment (affected by the business cycle)
relationship between the unemployment rate and the output gap:
- when actual aggregate output is equal to potential output, the actual unemployment rate is equal to the natural rate of unemployment
- when the output gap is positive (inflationary gap), the unemployment rate is below the natural rate. When the output gap is negative (recessionary gap), the unemployment rate is above the natural rate
- fluctuations of aggreagte output correspond to fluctuations of the unemployment rate
negative output gap is associated with ______ unemployment
high
positive output gap is associated with _____ unemployment
low
okun’s law
the negative relationship between the output gap ad cyclical unemployment
-rise in the output gap of 1 percentage point reduces the unemployment rate by 1/2 of a percentage point
expansionary policies lead to a ____ unemployment rate
lower
lower unemployment tends to lead to ____ inflation
higher
short-run philllips curve
the negative short-run relationship between the unemployment rate and the inflation rate
-slopes downward
supply shocks
shift the short run aggregate supply curve – and also shift the SRPC
- ex: surging oil prices
- change the infaltion rate
negative & positive supply shocks effects
- negative supply shock shifts SRPC up as inflation rate increases
- positive supply shock shifts SRPC down as inflation rate decreases
expected inflation rate
the rate of inflation that employers and workers expect in the near future
- most important factor, other than unemployment rate, affecting inflation
- shifts the SRPC
many economists believe that the relationship between changes in expected inflation and changes in actual inflation is ____
one-to-one
a attempt to trade off lower unemployment for higher inflation leads to ______ inflation over time
accelerating
nonaccelerating inflation rate of unemployment (NAIRU)
the unemployment rate at which inflation does not change over time
–the natural rate of unemployment
-the level of unemployment an economy needs in order to avoid accelerating inflation
long run phillips curve
shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience
- vertical because any unemployment rate below NAIRU leads to ever-accelerating inflation
- shows that there are limits to expansionary policies because unemployment below NAIRU cannot be maintained in the long run
- any unemployment rate above NAIRU leads to decelerating inflation
which is harder: bringing inflation down or up?
DOWN
disinflation
the process of bringing down inflation that is embedded in expectations
-very costly –> keeps unemployment rate high for an exptended period –>some economists think the cost can be reduced by explicitly stating determination to reduce inflation
deflation
falling aggregate price level
- common during WWII
- under deflation, lenders gain and borrowers lose (bc value of dollar is worth more in the future)
- Fisher claims that overall deflation reduces aggregate demand, deepening an economic slump
debt deflation
the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation
-significant in great depression
zero bound
bound on the nominal interest rate – it cannot go below zero
-limits the effectiveness of monetary policy
liquidity trap
occurs when conventional monetary policy is ineffective because nominal interest rates are up against the zero bound
-can occur whenever there is a sharp reduction in demand for loanable funds (happened during great depression)
