Topic 5 - IS-LM-PC model One Flashcards
What is the symbol for natural employment
Un
Where does the natural rate of unemployment occur
EQUILIBRIUM
WS=PS
P=P^e
Pi = pi(t-1) inflation is same as previous year
The change in inflation is zero
What does the equilibrium of IS-LM give us
Actual output in the economy
Actual output comes from ISLM, what does potential outcomes
Labour market equilibrium WS=PS
What would the effect of a rise in taxes be on the IS LM PC model that begins in equilibrium
Begin w IS=LM WS=PS and inflation is stable
Rise in taxes will lower consumption lower output multiplier lower investment and consumption
This will shift IS to the left
Now:
Y<Yn>WS
INFLATION DECELERATES
central bank must reduce interest rates to counteract this rise in taxes</Yn>
What does a shift onto the right of teh IS curve do to worker bargaining power
It will be relatively high (increases)
What does a shift of IS curve to right do to inflation
Will accelerate
What is the problem with workers having high bargaining power
They will demand higher wages
Firms respond with higher prices
This leads to a wage price spiral
Demand pull inflation
When did stagflation take place
1970s
Explain stagflation
No target for inflation in US
Monetary policy not conducted by a independent central bank, but tied to government of each country
Linked to Richard Nixon trying to boost growth without inflation
What is the aim of inflation in UK Europe and US
2%
What has UK output growth been like since 2008
Systematically lower
This lower trend output growth has puzzled academics and policy makers and is known as the UK productivity puzzle
What was the Volcker shock
The US fed chair Paul blockers policy to curb inflation in the US from 1979
Benefits of Volckers policy
Beat back the inflation problem
Politically unpopular but economically necessary
Represented independence
