Chapter 32 Inflation, Disinflation, And Deflation Flashcards
What is the classical model of the price level?
The model used by economists before John Maynard Keane. It combines the long run and Short run aggregate price level supply and demand models. This model focuses on the overall effect of a change in price levels and is particularly useful with economies experiencing persistently high inflation.
What happens to wage stickiness in periods of high inflation?
Short run stickiness of nominal wages and prices tends to vanish.
What is the government’s revenue from printed money called?
Seignorage. It refers to the right for the government to stamp gold and silver into coins and charge a fee for doing so.
What is the inflation tax?
The inflation tax is the reduction in the value of money held by the public due to the Government printing money to cover its budget deficit
How much money does the government get from increasing the money supply?
Seignorage = ΔM
Real signorage = ?
ΔΜ/P
Where P is the aggregate price level
Or it can be rewritten as
Real seignorage = (ΔM/M) x (M/P)
Real seignorage = the rate of growth of the money supply x real money supply
What occurs when the money supply increases in an economy with low inflation?
Short run aggregate output increases.
What occurs when the money supply increases in an economy with persistently high inflation?
The classical model of the price level dominates and there is no periodic increase in the aggregate output. Wages and workers have become desensitized to inflation.
Suppose that all wages and prices in an economy are indexed to inflation. Can there still be an inflation tax?
Yes regardless of whether not prices are indexed there is an inflation tax on people who hold money.
When actual aggregate output is equal to potential output, what is the actual unemployment rate equal to?
The natural rate of unemployment
When the output gap is positive, an inflationary gap, the unemployment rate is ______ the natural rate.
Below
When the output gap is negative, a recessionary gap, the unemployment rate is ______ the natural rate
Above
What is Okun’s law?
A rise in the output gap of one percentage point reduces the unemployment rate by about one half of a percentage point
What is the reason for Okun’s law? Why isn’t the relationship between unemployment and the output gap directly proportional or one-for-one?
Companies often me changes in demand in part by changing the number of hours their existing employees work
Also the number of workers looking for jobs is affected by the availability of jobs. This is the effect of discouraged workers entering or exiting the labor force on the employment rate
The rate of growth of labor productivity generally accelerates during booms and slows down or even turns negative during busts this dampens the changes in the unemployment rate
What is the short run Phillips curve?
Shows the negative relationship between the unemployment rate and the inflation rate.
