Class Notes - 11-26-07

Class Notes - 11-26-07 - Macroeconomics Class Notes...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
GRAPHICAL APPROACH TO PHILLIPS CURVE Step C Inflationary expectations rise – workers demand higher wages (wage increases) GRAPHICAL APPROACH TO PHILLIPS CURVE When Fed pushes the economy beyond potential – short-run – economic boom However – Long term, the net result is higher inflation AD and AS Model: High Expected Inflation High actual expected inflation because we are over the natural output level The Fed wants to drive inflation down and expectations down THEORY NUMBER ONE Keynes’ Stick Wage Approach The Inflation Rate can only be reduced by suffering through a period of high unemployment THE COST OF REDUCING INFLATION To reduce inflation, Fed pursues contractionary monetary policy This contracts AD and real output (Q) falls Economy starts to cool THE COST OF REDUCING INFLATION POINT : Endure period of high unemployment to reduce inflation Sacrificing ratio – Percent of output lost in reducing inflation by 1%
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/15/2008 for the course ECON 101 taught by Professor Golden during the Fall '07 term at Allegheny.

Page1 / 3

Class Notes - 11-26-07 - Macroeconomics Class Notes...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online