Lecture 15-16

Question 1

π₁ = π₀ + α(Y₁ − Yᶠᴺ)

Answer 1

π₁:
Inflation at time 1 (i.e., the inflation rate in the future period you’re analyzing, typically the next period).

π₀:
Inflation at time 0 (i.e., the inflation rate in the current period).

α:
A constant that represents the sensitivity of inflation to the output gap. This shows how responsive inflation is to changes in output. The higher α is, the more inflation changes with shifts in output.

Y₁:
The actual output (or actual GDP) in the future period.

Yᶠᴺ:
The natural level of output (or potential output), which is the level of output that the economy can sustain without causing inflation to rise or fall — it’s essentially the long-run equilibrium level of output, where the economy is fully employed without any inflationary pressure.

(Y₁ − Yᶠᴺ):
The output gap, which is the difference between actual output (Y₁) and the natural level of output (Yᶠᴺ). If Y₁ > Yᶠᴺ, there’s a positive output gap, meaning the economy is operating above its potential (often causing inflation to rise). If Y₁ < Yᶠᴺ, there’s a negative output gap, meaning the economy is underperforming (which could lead to lower inflation or deflation).

Question 2

What is the inverse relationship in the philpps cirves

Answer 2

unemployment high= inflation low
Unemployment low=inflation high

Question 3

What could the governmnet do under the Philipps curve situation?

Answer 3

He could run expansionary monetary policy

Question 4

Why did kensian go down ?

Answer 4

Because of the oil shocks, in 70s to ealr 80s, they puched up inflation and hit output

Question 5

What did the oil shocks do that broke down what keynes said exactly?

Answer 5

When the embargo happened– It made inflation skyrocket and unemployment as well= stagflation

Question 6

Where did neoliberalism come from?

Answer 6

It was a pre-analytic vision of how the world is or should be form aynrand, fallen grenspan and milton friedman

Question 7

What are some components to the neoliberal revolution?

Answer 7

they mixed together micro+ micro through rational expectations, market clearing
there was an attack on the idea that one cane make broad inferences about the relationship at macro level without understanding individual behavior
macro will be made proper by having micro foundation

Question 8

wHAT IS THE neoclassical stody RBC during the oil shock

Answer 8

Stagflation caused by negative productivityshock resulting from oil price shock butmade worse because markets cannot adjust
owing to “sticky wages” (readprotections for people)

RBC models argue that sharp tightening of American monetary policy by Fed under
Volcker has little effect on output or
employment

Only effects of money are to raise prices, and timing depends on expectations

Question 9

What is the story of kensian during the oil shock

Answer 9

Stagflation of 1970s caused first by two oil shocks that simultaneously reduce productive capacity of the economy and push up prices (so obvious)

Recession deepened by Federal Reserve’s policy reaction of tightening monetary policy, with interest rates rising by over 10
percentage points and nominal rates hitting 20+ per cent

Resulting fall in output and rise in un caused inflation to decelerate

Question 10

What are som shocks that can occur?

Answer 10

Sudden increase / decrease in output (i.e., the famous “productivity shock”)
Increase in investment (amount of capital goods)
Random change in wages, or random change in prices
Sudden change is risk preference of investors
Abrupt decline of increase in demand for leisure (more / less labour)

Question 11

Rational expectations?

Answer 11

The subjective expectation of all individuals equals the objective mathematical
expectation of the relevant theory conditioned on the data available when the theory was
formed.