L11 Inflation

Question 1

Types of inflation?

Answer 1

Demand pull

Cost push

Question 2

DPI

Answer 2

Due to Increase in AD
Classical one time PL increase
But if persistent AD increase
Money supply
Demand Pull Inflation Spirals
rGDP and unemp no change as hoped

Question 3

Example DPI

Answer 3

In 1972-73, the government pursued expansionary MP FP pursuit of economic growth

By the mid-1970s, the inflation rate was more than 20% per year!

Consistent with a demand-pull inflation spiral, the growth rate of real GDP didn’t increase and the unemployment rate didn’t decrease

policymakers were pursuing - and misusing - Keynesian policies

Question 4

Misery Index?

Answer 4

In the 1970s, when US inflation was raging at a double-digit rate, Arthur Okun proposed a Misery Index -

inflation plus the unemployment rate

Inf- cost of living increase
Unemp- loss or fear of loss of job

Question 5

Example CPI

Answer 5

mid-to-late 1970s,
after OPEC limit supply so caused a sharp rise in oil prices
SAS, to the left

From 1975-1977, the Bank of England allowed the quantity of money to grow, feeding a cost-push inflation spiral

Late 1970s As a result, inflation rose above 10% per year

1979 and 1980 oil prices rose again but The Bank of England did not boost AD

The result recession, but also a fall in inflation

In 1979, elected the Thatcher government which promised to pursue economic policies that would lower inflation and restore incentives for economic growth

Question 6

Phillips Curve?

Answer 6

Inflation rate vs unemp rate

SRPC LRPC

Question 7

SRPC

Answer 7

When expected
inflation & natural rate of unemp constant
Curve slope down, pass through pt where inflation expected inflation and unemp is natural unemp rate.
Inflation incr unemp decr imagine SAS

Question 8

LRPC

Answer 8

Inflation vs unemp when actual inflation rate equal expected inflation rate
Graph vertical
Policy inflation increase are expected early so workers bargain MWR so MW increase unemp at natural
Fall in inflation, SRPC shift down

Shows that no trade off btwn inflation and unemp

Question 9

Example SRLRPC

Answer 9

mid-1970s to the mid-1980s UK and US experienced a substantial rise in inflation expectations

Before bringing inflation expectations back down to low levels in the 1990s and 2000s

short run Phillips curve shifted upwards before shifting back towards its original position

Question 10

CPI

Answer 10

When prodn cost increase
One time if no change in AD
But if fixed by increase money supply by BoE
AD increase persistent, inflation
Stagflation