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Economic principles 2 > Unemployment, Inflation and Output Gap > Flashcards

Unemployment, Inflation and Output Gap Flashcards

1
Q

what were some features of the roaring 20s

A 
jazz era,
consumerism,
investment,
inventions,
advertising
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2
Q

when was the stock market crash

A

1929

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3
Q

what does theory say should happen to inflation and growth if unemployment goes down

A

inflation up,

growth up

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4
Q

what does war do to gdp growth

A

falls (economic shock) then rises after as economy is restructured

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5
Q

what happened to gdp growth and unemployment during ww1

A

low gdp growth, high unemployment

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6
Q

what happened to gdp growth and unemployment during the roaring twenties

A

high gdp growth, low unemployment

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7
Q

what are two features of the great depression

A

stock market crash,

one of the big consequences is unemployment

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8
Q

what is the relationship between inflation and growth

A

positive relationship

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9
Q

what is the relationship between unemployment and inflation

A

negative relationship

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10
Q

what is the relationship between unemployment and growth

A

negative relationship

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11
Q

unemployed d (loose)

A

looking for a job, able to work but cannot find one

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12
Q

unemployment rate equation

A

unemployed / labour force x 100

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13
Q

participation rate equation

A

labour force / population of working age

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14
Q

what does N mean

A

employment, number of people working

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15
Q

what does U mean

A

unemployed, number of people unemployed, millions

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16
Q

what does L stand for

A

labour force (willing and able)

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17
Q

what does u stand for

A

unemployment rate

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18
Q

equation for u in symbols

A

u = U/L = (L-N)/L

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19
Q

what is unemployment rate (u) a good indicator of

A

how easy or difficult it is to find a job

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20
Q

what can the unemployment rate (u) overstate

A

those who are confident that they will find a job but haven’t accepted position

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21
Q

how can the unemployment rate (u) understate unemployment

A

discouraged to search for a job,
working part-time but want full time,
whose skills are not supported by job (phd),
marginally attached (looked in recent past but not currently looking)

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22
Q

frictional unemployment d

A

unemployment that exists in the economy due to people moving from one job to another, because of frictions in the market

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23
Q

structural unemployment d

A

unemployment resulting from a mismatch of skills due to the changing nature of the market

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24
Q

creative destruction (in terms of unemployment)

A

unemployment due to changing nature of the workplace due to advancements in technology etc

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25
Q

what does u* mean

A

natural rate of unemployment

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26
Q

symbol for natural rate of unemployment

A

u*

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27
Q

natural rate of unemployment equation (in words)

A

structural + frictional unemployment

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28
Q

cyclical unemployment d

A

unemployment due to the economic cycle

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29
Q

do countries have different or the same natural rates of unemployment

A

different

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30
Q

what is the uk natural rate of unemployment

A

6.9%

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31
Q

what is something that the unemployment rate cannot tell us (u)

A

if the rate is high because people are staying unemployed longer or because more workers lost jobs

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32
Q

who are the three states in the employment diagram

A

employment, out of labour force, unemployment

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33
Q

what are the flows between out of labour force and employment in the diagram

A 
new entries (from out of labour force to employment),
retirements (from employment to out of labour force)
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34
Q

what is the flow from employment to itself

A

quit to other jobs

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35
Q

what are the flows between employment and unemployment in the diagram

A 
job finds (from unemployment to employment),
lay offs / quits (from employment to unemployment)
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36
Q

what are the flows between unemployment and out of labour force in the diagram

A

unsuccessful new entries (from out of labour force to unemployment),
discouraged (from unemployment to out of labour force)

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37
Q

what does s mean

A

share of employed who lose or leave jobs in every period (job separation)

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38
Q

what does f mean

A

fraction of unemployed who find job each period (rate of job finding)

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39
Q

what does L mean§

A

labour force

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40
Q

equation for L using s and f

A

L = Nt + Ut

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41
Q

formula for ∆Ut+1 (star)

A

∆Ut+1 = sNt - fUt,

change in unemployment rate = employed who lose their jobs - unemployed who find new jobs

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42
Q

what is the change in unemployment rate given by (words)

A

difference between inflows into unemployment and outflows

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43
Q

equation for natural rate of unemployment using symbols

A

u* = s / (s+f)

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44
Q

beveridge curve d

A

curve that reflects the negative relationship between vacancies and unemployment

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45
Q

what was lord william beveridge’s statement

A

as vacancies increase the number of unemployed declines

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46
Q

explain the beveridge curve diagram

A

x - unemployment rate percentage
y - job vancancy rate percentage,
downward sloping curve like an l

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47
Q

where i the labour market tight and slack on the beveridge curve

A

tight at point a which is to the left at the top,

slack at point b which is to the right and at the bottom

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48
Q

explain features of tight labour market and where it is on the beveridge curve

A

at point a top left,

demand for labour high, low unemployment, employers experience difficulty finding qualified workers so vacancy rate high

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49
Q

explain features of slack labour market and where it is on the beveridge curve

A

at point b bottom right,

demand for labour low, high unemployment, few employers posting job offerings so vacancy low

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50
Q

what do points a and b relate to on the beveridge curve diagram (x - unemployment rate % y - job vacancy rate % downward sloping curve)

A 
a = boom,
b = recession
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51
Q

what are movements along the beveridge curve associated with

A

business cycle

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52
Q

what does the further the beveridge curve is away from the origin mean

A

the further away the curve from the origin the more inefficient the labour market is at matching open vacancies with people that are unemployed

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53
Q

what are features of a beveridge curve shift to the right (away from the origin)

A

more labour market inefficiency,
both higher job vacancy rates and higher unemployment than before,
both more open jobs and more unemployed people

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54
Q

what does frictional unemployment do to the Beveridge curve

A

more unemployment arises because it takes time to find a job that is a good fit, Beveridge curve shifts to the right

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55
Q

what does structural unemployment do to the beveridge curve

A

skills of labour force don’t match with skills employers want, higher vacancy and unemployment so shifts to the right

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56
Q

what does economic uncertainty do to the beveridge curve

A

when an economy’s outlook is uncertain, firms hesitant to make commitment to hire, beveridge curve shifts to the right

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57
Q

what are some other factors that could affect the beveridge curve

A

changes in the prevalence of long-term unemployment,

changes in the labour participation rate (don’t think you have to worry about this card too much)

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58
Q

hello future matthew

A

i am very interested as to when you will be seeing this,
it is currently 11/2/17 i hope revision is going well and i hope you’re happy and over anna more,
got sub focus tonight so its that weekend she was meant to be here and i just got a little sad listening to our songs,
i hope youre alright and revision is going well

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59
Q

who is searching for a job costly for

A

it is costly for both employer and employee to search for jobs

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60
Q

what does asymmetric information create in the job search market and what are some examples of asymmetric information in the job market

A

asymmetric information creates inefficiency (shift out of beveridge curve),
stuff like wages (sometimes not stated when applying) or other specific things)

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61
Q

why would a beveridge curve be far away from the origin

A

workers badly informed,
unable to take up offers due to mobility,
inadequate skills,
unwilling to change or adapt

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62
Q

why do we have people unemployed and at the same time vacant jobs not filled

A

labour market doesn’t clear in same way as goods market due to frictions, and matching newly unemployed with newly posted jobs is difficult

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63
Q

what is trade in the labour market for firms and workers

A

uncoordinated, time consuming and costly

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64
Q

how is trade in the labour market costly for workers

A

workers need to spend time and resources to locate suitable job opportunities

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65
Q

how is trade in the labour market costly for firms

A

firms need to spend time and resources to locate and screen job applicants

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66
Q

explain a perfectly competitive labour market

A

firms and workers meet costlessly and trade at a single wage, any excess labour supply absorbed instantaneously through fall in equilibrium wage

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67
Q

explain the current exam setup

A

section A - multiple choice 10%,
section B - 3 questions 25 marks each,
section C - 2 short questions, only answer 1, 15 marks2q

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68
Q

what does the matching function do

A

brings unemployed workers and vacancies together

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69
Q

what is the matching function (formula)

A

m(u,v),
u is stock of unemployed,
v is stock of vacant posts

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70
Q

what is the equation for the matching function

A

m = u^α v^(1-α),
u is stock of unemployed,
v is stock of vacant posts

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71
Q

what is the equation for labour market tightness

A

θ = v/u,

labour market tightness = stock of vacant posts / stock of unemployed

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72
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if α + β = 1

A

constant returns to scale

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73
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if α + β > 1

A

increasing returns to scale

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74
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if α + β < 1

A

decreasing returns to scale

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75
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if α > 0

A

positive marginal returns (is the same for beta repectively)

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76
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if 0 < α < 1

A

increasing at a decreasing rate (is the same for beta repectively)

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77
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if α=1

A

increasing at a constant rate (is the same for beta repectively)

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78
Q

in the cobb douglas function of (Y=AL^αK^β) what does it mean if α > 1

A

increasing at an increasing rate (is the same for beta repectively)

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79
Q

if the matching function is m=Au^αv^(1-α) then what could bring about a change in the A

A

cv website,
improvement in the job centre processes,
(these are improvements in matching)

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80
Q

if u goes up what does that do to the labour tightness equation

A

u up theta down, slack market, favours firms,
(θ = v/u,
labour market tightness = stock of vacant posts / stock of unemployed)

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81
Q

if v goes up what does that do to labour tightness equation

A

v up theta up, tight market, favours workers

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82
Q

job finding rate d

A

probability of unemployed worker finding a job

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83
Q

what is the job finding rate first bit of equation

A

m(u,v)/u,

matching function divided by the stock of unemployed workers (not sure about little u and U)

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84
Q

what is the job finding rate equation (f)

A

m(u.v)/u = (u^αv^1-α)/u = u^α-1v^1-α = (v/u)^1-α = θ^1-α=f,

where θ = v/u

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85
Q

are you more or less likely to get hired if the labour market is tight

A

more likely to be hired

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86
Q

what is the probability of finding a job related to

A

labour market tightness

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87
Q

what is the formula for the rate at which the position will be filled (start with matching function)

A

m(u,v)/v = (uαv^1-α)/v = u^αv^-α = (u/v)^α = (1/θ)^α = θ^-α

88
Q

equation for change in the number of people unemployed

A

∆U = sN - fU = s(L-U) - fU,
change in number of people unemployed = separation rateno. employed - finding rateno. unemployed, L is size of labour force for that last bit

89
Q

what does sNt represent

A

separation rate * number of people employed,

number of people who move from employment to unemployment in time period t

90
Q

what does fUt represent

A

finding rate * number of people unemployed,

number of people who move from unemployment to employment in time period t

91
Q

what is fU

A

probability will find job x no. unemployed

92
Q

what is sN

A

probability will lose job x no. employed

93
Q

what is N equal to in terms of L and U

A

N = L - U

94
Q

what do you to to equation (∆U = s(L-U) - fU) now

A

divide by L to get,

∆U/L = S(L-U)/L - f(U/L)

95
Q

what do you do to equation (∆U/L = S(L-U)/L - f(U/L)) now

A

∆u = s(1-u) - fu

96
Q

what do you do to (∆u = s(1-u) - fu) to find the steady rate of unemployment

A

∆u = 0 so fu = s(1-u)

97
Q

what is the steady rate of unemployment

A

the unemployment rate is constant over time

98
Q

what do you do to this (∆u = 0 so fu = s(1-u)) to find a value for u

A

sub in the finding rate f=θ^1-α,
θ^1-αu = s(1-u) then rearrange to get,
u = s/(s+θ^1-α),
this is the inverse beveridge curve

99
Q

what curve is this the equation for (u = s/(s+θ^1-α))

A

beveridge curve

100
Q

explain chain of reasoning for beveridge, lots of vacancies

A

lots of vacancies, lots of jobs, so low unemployment

101
Q

explain chain of reasoning for beveridge, few vacancies

A

few vacancies, few jobs, high unemployment

102
Q

what is the final step in beveridge curve derivation (u = s/(s+θ^1-α))

A

θ=v/u so,

u = s/(s+(v/u)^(1-α))

103
Q

what does this equation mean if V goes up or down u = s/(s+(v/u)^(1-α))

A

v up u down,

v down u up

104
Q

what is disinflation

A

lower rate of inflation (but still inflation)

105
Q

CPI d

A

headline measure of inflation, derived from movements in a weighted basket of consumer goods

106
Q

difference between the CPI and RPI

A

rpi includes housing costs such as mortgage interest payments and council tax

107
Q

what is zero inflation

A

constant price level from year to year

108
Q

equation for the growth rate of inflation if P is the consumer price index

A

πt = (Pt - Pt-1) / Pt-1

109
Q

what symbol is the CPI index

A

P

110
Q

country example of inflation

A

zimbabwe

111
Q

country example of deflation

A

japan

112
Q

what are the causes of inflation

A

cost-push inflation,
print money,
demand pull inflation

113
Q

explain demand pull inflation

A

increase in aggregated demand for goods and services not followed by aggregate supply increases lead to price increase

114
Q

explain cost push inflation

A

supply side factors trigger inflation (oil price for example), price rise translates higher costs into higher prices,
or fall in currency increase production costs

115
Q

explain print money inflation

A

waters down the value of money already in circulation, more money chasing same goods so lead to increased demand and higher prices

116
Q

what countries cannot print money

A

eurozone countries because do not have control of their own monetary policy

117
Q

tell me about changes in zimbabwe’s inflation rate

A

1980s - annual inflation 5.4%,
2008 - monthly inflation 2600.2%
yearly inflation 231 million %

118
Q

what was the first part that caused zimbabwe’s inflation problem

A

weakening began in 1999 due to periods of drought adversely affected the agriculturally dependent nation,
output fell 50% between 2000 and 2009,
decline in main foreign exchange tobacco

119
Q

what was the second part that caused zimbabwe’s inflation problem

A

uncontrolled government spending,
increased taxes however failed after tu led protests,
printed money to finance government spending and corruption,
spend more due to congo civil war 1998,
keep on printing money to cover expenditure,
wave of emigration falling population and labour force,
shrinking tax base and revenue so print more money

120
Q

fact about emigration from zimbabwe

A

2010 emigrated totalled 1.25 million 9.9%

121
Q

what were effects of zimbabwe inflation

A

had to abandon currency,
population displacement,
unemployment 80%

122
Q

what is ricardian equivalence

A

economic theory that suggests when a government tries to stimulate an economy by increasing debt-financed government spending, demand remains unchanged (public saves excess money to pay for future expected tax increases that will be used to pay off the debt)

123
Q

what was the first part of the japan deflation

A 
low overnight call rate,
heavy investment spending,
asset bubble due to low interest rates,
high growth,
this is all in 1986-1989
124
Q

when was the japan economy doing well before the deflation

A

1986-1989

125
Q

what was the second part of the japan deflation

A

increase in interest rates to avoid inflation,
at same time asset price bubble crashes and crash in stock market,
1990s deflation

126
Q

what were the effects of the 1990s deflation in japan

A

national wealth declined as property values fall,
companies didn’t invest so didn’t expand,
postponing consumption (belief things become cheaper),
prices decline more => save more because price drop,
companies lost more and laid off workers,
deflationary spiral and depression

127
Q

deflation doesn’t just mean lower prices, it also means …

A

higher unemployment and lower wages

128
Q

what does nirp stand for

A

negative interest rate policy

129
Q

purchasing power parity d

A

exchange rates that take into account how much a typical basket of goods in one country costs compared to another country

130
Q

how is economic growth measured

A

as percentage change in real gdp

131
Q

what symbol is used for gdp per capita

A

y

132
Q

equation for growth rate of GDP per capita

A

(Yt+1 - Yt) / Yt

133
Q

what is the equation of the quantity theory of money

A

Mt x Vt = Pt x Yt,

money supply x velocity of money = CPI x real GDP

134
Q

what is the symbol for velocity of money and what is it

A

Vt,

average number of times per year that each piece of paper currency is used in transaction

135
Q

what is assumed to be constant in the quantity theory of money (MV=PY)

A

V, velocity of money

136
Q

transform the equation MV=PY to show the growth rates of each variable

A

gM + gV = gP + gY

137
Q

what do you do next to the growth equation of the quantity theory of money (gM + gV = gP + gY)

A

assume that velocity of money is constant and the growth rate of CPI is inflation so π,
gM + 0 = π + gY

138
Q

what do you do to the growth rate of money supply equation to show inflation (gM + 0 = π + gY)

A

π = gM - gY,
and because the growth rate of a country is assumed to be constant this shows that inflation is equal to the money supply (controlled by the central bank)

139
Q

what was Milton Friedman’s point

A

inflation is always and everywhere a monetary phenomenon

140
Q

what can be said about this equation if gY is constant (π = gM - gY)

A

an increase in the money supply = increase in inflation

141
Q

example of where growth rate of money leads to inflation

A

zimbabwe

142
Q

example where growth rate of money did not lead to inflation

A

US during financial crisis

143
Q

example of which does not agree with quantity theory of money

A

hyperinflation in germany where inflation was a lot higher than the money supply

144
Q

what symbol is the output gap shown by

A

Xt

145
Q

equation for output gap

A

Xt = (Yt - Ybart) / Ybart

146
Q

what is the output gap in the long run

A

0, because on long run trend

147
Q

what is the aim of policy makers in terms of output gap

A

on trend because don’t want inflation (+ve output gap) or unemployment (-ve output gap)

148
Q

what is the symbol for potential output

A

Ybart

149
Q

what does this symbol represent - Ybart

A

potential output

150
Q

what is the conflicting objective of low and stable inflation

A

high unemployment and low output growth

151
Q

what is the conflicting objective of low unemployment

A

high inflation

152
Q

what is the conflicting objective of high output growth

A

high inflation

153
Q

what does ∆ut equal (change in rate of unemployment)

A

ut - ut+1

154
Q

what does the β symbol mean in the Okun’s law equation (ut - ut+1 = -β(gyt - gbary))

A

Okun’s coefficient

155
Q

what does gyt mean

A

growth rate in output

156
Q

what is the equation for Okun’s law in terms of growth

A

ut - ut+1 = -β(gyt - gbary),

change in unemployment = okun’s coefficient x difference between current growth and trend growth

157
Q

what does the β in Okun’s law represent

A

how much the growth rate affects unemployment

158
Q

with Okun’s law growth rate equation (ut - ut+1 = -β(gyt - gbary)) what does a low β mean in terms of the line

A

flatter line

159
Q

example of Okun’s law growth rate equation (ut - ut+1 = -β(gyt - gbary)) with low β and why is this

A

more flat line, Japan because of labour contracts, even if in recession do not let go of workers

160
Q

what happens to unemployment when an economy grows fast and output is above trend

A

demand for labour is strong and unemployment falls below equilibrium levels

161
Q

equation for Okun’s law relating to output gap

A

ut - u* = -hxt,

unemployment - natural rate of unemployment = okun’s coefficient x output gap

162
Q

what does the h in okun’s law for output gap represent

A

okun’s coefficient

163
Q

what two letters represent okun’s coefficient

A

h and β

164
Q

for the okun’s law equation what happens to unemployment if xt > 0 (ut - u* = -hxt)

A

unemployment below natural rate

165
Q

what happens in terms of workers bargaining power and stuff when unemployment is low

A

workers have more bargaining power so can ask for higher wages etc because smaller pool of unemployed people for firms to hire from

166
Q

phillips curve d

A

an economic model that shows a trade off between inflation and unemployment

167
Q

when did the phillips curve become unstable and why

A

1970s,
oil shocks,
many phillips curves after that

168
Q

if π=0 what is unemployment doing

A

economy is on natural rate of unemployment

169
Q

equation for πt

A

πt = -α(ut - u*),

170
Q

what symbol is used to represent an oil shock in the inflation calculations

A

η,

eta

171
Q

how does the equation πt = -α(ut - u*) change when there is an oil shock = η

A

πt = -α(ut - u*) + η

172
Q

πt = -α(ut - u*) + η,

what does this equation tell us

A

even at the natural rate of unemployment there is inflation,

there is +π for every level of unemployment

173
Q

what does oil shock do to phillips curve

A

curve shifts up

174
Q

what is the symbol for expected inflation

A

πe (e is high)

175
Q

after 1970 what is inflation now

A

πe no longer 0, now positive

176
Q

what does future inflation encourage

A

encourages consumption now, this creates inflation

177
Q

what does a government aim for in terms of output gap

A

want to avoid an output gap both ways

178
Q

how do you combine these two equations okun’s output and phillips curve equation,
Ut - U* = -hXt,
πt = πe - α(ut - u*) + η (star)

A

πt = πe - α(-hxt) + η

179
Q

how does this equation change when you substitute (-α)*(-h)=γ,
πt = πe - α(-hxt) + η

A

πt = πe + γxt + η

180
Q

what happens to equation πt = πe + γxt + η if we use adaptive expectations (star this card

A 
πet = πt-1, so,
πt = πt-1 + γxt + η, so,
∆πt = γxt + η,
∆πt = demand pull inflation + supply shock inflation
181
Q

what does adaptive expectations means for inflation

A

πet = πt-1

182
Q

what is the symbol for the number of people in the labour force

A

L with a line over the top like mean, bar

183
Q

what is the equation for number of people in the labour force

A

Et + Ut,

no of employed and no of unemployed

184
Q

equation for bathtub model

A

∆Ut+1 = sbarEt - fbarUt,

change in unemployment = employed people who lose their jobs - unemployed people who find new jobs

185
Q

symbol for job separation rate

A

sbar

186
Q

symbol for job finding rate

A

fbar

187
Q

equation for number of employed people who lose their job in the period

A

sbarEt,

job separation rate * number of employed people

188
Q

equation for number of unemployed people who find new jobs in the period

A

fbarUt,

job finding rate * number of unemployed people

189
Q

how do you solve the bathtub model mathematically,

write down on paper

A

set ∆Ut+1=0,
0=sbarEt - fbarUt,
=sbar(Lbar - Ut) - fbarUt,
0 = sbarLbar - (fbar + sbar) Ut

190
Q

what happens when you solve this equation for Ut (0 = sbarLbar - (fbar + sbar) Ut),
write down on paper)

A

U* = (sbar Lbar) / (fbar + sbar),

this gives the number of people unemployed in steady state

191
Q

what do you do to equation (U* = (sbar Lbar) / (fbar + sbar)) to get unemployment rate (unemployment rate is fraction of labour force that is unemployed) (write it down)

A

u* = U* / Lbar = sbar / fbar + sbar

192
Q

what did beveridge notice

A

that when unemployment was high, the vacancy rate was low, and when unemployment was low, the vacancy rate was high

193
Q

what is the beveridge curve

A

the relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force)

194
Q

what are reasons why there can be vacant jobs that are not filled and unemployed people looking for a job at the same time

A

mismatch between the location and nature of the workers looking for jobs and jobs looking for workers (skills),
either jobseekers or those seeking to hire may not have relevant information

195
Q

what should be a central component of any adequate description of the “equilibrium” in labour markets

A

a model of the job matching process

196
Q

what is churning in the economy

A

job loss, quits and job creation are related to the overall pace of reallocation or ‘churning’ in the economy

197
Q

what does more churning imply

A

lower job tenure,
more time spent moving among firms,
each month more workers flow into unemployment and more new vacancies are posted (shifts beveridge curve outwards)

198
Q

what would greater job matching efficiency do to the beveridge curve

A

bring about an inward shift

199
Q

whats the equation for a change in unemployment rate (it makes a graph)

A

∆Ut = - β (gyt - gbary)

200
Q

what does this equation look like on a graph and what are the axis, ∆Ut = - β (Gyt - gbary)

A

y = Ut,
x = gyt,
downward sloping line going through points (0,4) and (4,0) roughly

201
Q

in the equation (∆Ut = - β (Gyt - gbary)), what happens to unemployment if growth increases by 1%

A

the change in unemployment is -β

202
Q

how do you use equation (∆Ut = - β (Gyt - gbary)) to calculate long term growth rate

A

set the change in unemployment equal to 0,
then solve for gbary because that is the long term growth rate (try and find example question because am a bit confused by this)

203
Q

what does less liquid mean

A

harder to turn into currency in a short period of time

204
Q

what does the quantity theory of money allow us to make a connection between

A

money and inflation

205
Q

what is the equation for the rate of inflation from the quantity theory of money equation MV=PY given what you know about two of them being constant and the equation for calculating growth rates (try and acc do this and not just look at the answer and remember it)

A

MV=PY,
gm +gv = gp + gy,
velocity constant so gv = 0,
π* = gm - gy

206
Q

what is adaptive expectations

A

firms expect the rate of inflation in the coming year to equal the rate of inflation that prevailed during the past year

207
Q

what is the equation for inflation in symbols (equation of phillips curve) not including shocks *

A 
πt = πt-1 + vbarY~bart,
inflation = expected inflation due to adaptive expectations + demand conditions (vbar measures how sensitive inflation is to demand conditions and Y~bart is the output gap)
208
Q

explain both parts of this vbarY~bart used in the equation for the phillips curve

A

vbar measures how sensitive inflation is to demand conditions,
Y~bart is the output gap at time t

209
Q

what is the equation for inflation in symbols (equation of the phillips curve) with all bits *

A 
πt = πt-1 + vbarY~bart + obar,
inflation = expected inflation due to adaptive expectations + demand conditions (vbar measures how sensitive inflation is to demand conditions and Y~bart is the output gap) + shock to inflation (denoted by o to suggest oil price shocks)
210
Q

what is the equation for the change in inflation (similar to phillips curve)

A

∆πt = vbarY~bart + obar,
because of adaptive expectations you can get rid of the πt-1 term because it is the same as last year so the only change comes from these terms

211
Q

wha does an oil price shock do to the phillips curve,

inflation on y, output gap on x

A

shifts it up

212
Q

what is the vbarY~bart term referred to as in the phillips curve equation

A

demand-pull inflation

213
Q

velocity of money d

A

average number of times per year that each piece of paper currency is used in a transaction

214
Q

what are the determinants of velocity of money

A

institutions in economy that affect the way individuals conduct transactions,
introduction of credit cards required less money in economy,
if more convenient to pay with cash then more money used to conduct the transactions

215
Q

is milton friedman’s statement that “inflation is always and everywhere a monetary phenomenon” true

A

it is accurate in the long run, but is not supported by the data for the short run

Economic principles 2 (7 decks)

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