Week 8 - IS-LM-PC

Question 1

What is the equation for natural output (Yn)?

Answer 1

natural output

Yn = L(1-Un)

Question 2

What is the equation for an output gap?

Answer 2

Output Gap

Y-Yn = -L (U-Un)

Question 3

What does it mean if U > Un?

Answer 3

If U > Un = > Y < Yn

=> negative output gap

Question 4

What does it mean if U < Un?

Answer 4

If U < Un => Y > Yn

=> positive output gap

Question 5

What happens when there is a positive output gap?

Answer 5

If there is a positive output gap ( Y > Yn)

=> Actual inflation is greater than the target inflation

Question 6

What is run away inflation?

Answer 6

Run away inflation
= When there is a positive output gap and inflation is unanchored, the inflation expectation continues to add each period

Question 7

What is Okum’s Law?

Answer 7

Okum’s Law

low output growth = unemployment increase

high output growth = unemployment decrease

Question 8

What is the Okun coefficient?

Answer 8

Okun coefficient = 0.4

States that a 1% increase in output decreases unemployment by 0.4%