W4P4 - Notebook LM Flashcards
What is the Expectations-Augmented Philips Curve?
A model describing the relationship between inflation and unemployment. When inflation exceeds expectations, unemployment falls below its natural rate. When inflation matches expectations, unemployment is at its natural rate.
What is core inflation?
An inflation measure that removes volatile CPI components like fuel and food, which are outside of central bank control. It is less volatile than the overall CPI and also less volatile than inflation expectations.
How does the volatility of core inflation compare to that of the CPI?
Core inflation is significantly less volatile than the CPI. For example, in the UK from 1978-2024, the standard deviation of core inflation was 1.5, while the standard deviation of the CPI was 3.6.
What is the old view of the Philips curve?
The original model from the 1960s which focused on the relationship between the unemployment gap and wage inflation, without considering inflation expectations.
What is a problem with the old view of the Philips curve?
It doesn’t account for how people’s inflation expectations change in response to central bank policies. A central bank prioritizing low unemployment could increase inflation, driving down real wages and unemployment in the short term, but this leads to increased inflation expectations and further inflation.
What does empirical evidence show about the Philips curve?
A clear negative relationship between unemployment and inflation was apparent in the 1960s but broke down in the 1970s, 80s, and 90s. A negative relationship re-emerged in the 2000s, but it appears flat in the 2010s, and there is no clear relationship in the long run. The Philips curve seems to have flattened over time.
What are the implications of a flattened Philips Curve?
Central banks can stimulate the economy with demand-side policies and increase output without significantly raising inflation. Conversely, reducing high inflation might require larger increases in unemployment.
What is the output gap?
The difference between the current output and the trend output.
What is the relationship between the output gap and the deviation of unemployment from its natural rate?
There is a strong negative relationship. A 2% difference between actual and trend output is associated with a 1% difference in unemployment from its natural rate.
What is Okun’s Law?
The relationship between the output gap and the unemployment gap. Output above trend is associated with unemployment below the natural rate, and vice versa.
What is the Aggregate Supply (AS) Schedule?
The combination of the Philips Curve and Okun’s Law.
