Module 4: PC, stagflation & burst bubbles Flashcards
what is stagflation?
high/rising infl. + high/rising unempl.
what does phillips curve modern theory revolve around?
all about NRU level for economy (same as LRPC)
when would the curve shift right?
when at NRU and Ms∆, results in infl. and low unempl.
workers accept low wages when…
they have info problems or contract obligations
what does high expected infl. do to the curve and to AS?
shifts SRPC higher, and AS higher too until workers realize
what is really the phillips curve?
graph that states the inverse relationship between infl. and unempl., the modern one includes short and long-run
policy implications of no long-run trade-off?
reducing NRU, accelerationist hypothesis (infl. high, unempl. low), policy ineffectiveness when at NRU…
why lowering infl. requires recession?
wages&prices inflexible, so it takes a while to adjust to expect. infl.
what are wages&prices control used for?
to move economy down the LRPC (only works if accompanied by monetary and fiscal policies)
possible causes of stagflation?
-institutional changes (increased NRU due to higher payment benefits)
-current fight against infl.
-labor hoarding
-participation rate changes
-infl. variability = high uncertainty
what are bubbles?
expansions that should have never happened, misallocations of resources
what does not cure bubbles?
demand-sided policies
how can the fed lose control of Ms?
-underestimating NRU
-reacting to - supply shocks
-fixing nominal int. rates
-financing gov’t spending
-politicians buying votes
-fixing exchange rate
