Economics 100B - 28 (4-26-2007)

Economics 100B - 28 (4-26-2007) - Economics 100B Professor...

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ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course LECTURE Today we will discuss inflation, deflation, disinflation and stabilization policy. Inflation and Deflation The key to understanding changes in the inflation rate is the π adjustment equation: Π t = Π t-1 + f(Y t-1 – Y t ) +Z This equation describes the process of inflation (stable, accelerating, and disinflation) and deflation. Stable Inflation Stable inflation will occur when the economy is at potential GDP (Y t-1 = Y t-1 *) Y t-1 – Y* t-1 = 0 Π t = π t-1 U t-1 = U* t-1 Accelerating Inflation Accelerating inflation occurs when Y t- 1 > Y* t-1 Y t-1 – Y* t-1 > 0 Π t > Π t-1 U t-1 < U* t-1 Disinflation Disinflation will take place when the economy last year is operating below its potential level (Y t-1 < Y t-1 *) Y t-1 – Y* t-1 < 0 Π t < Π t-1 U t-1 > U* t-1 Deflation Deflation is when the inflation rate is negative. This means that the output gap must still be negative. Deflation occurs when Y t-1 < Y t-1 * by either a substantial amount and/or for a substantial time period. U t-1 > U* t-1 Japan has recently experience deflation. It entered a recession in the early 90s and essentially never came out of it. Stabilization Policy Most economists agree on the desirability of a stable economy around Y*. However, many economists disagree about
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ASUC Lecture Notes Online Economics 100B 04/26/07 the efficacy of stabilization policy. There are two main issues: The Economy is self-correcting. Remember our adjustments from last time; we had natural adjustments back to potential GDP. So why do we need to do anything? We could argue that self-correction just takes too long (as in the case of the great depression). 2)
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This note was uploaded on 09/20/2009 for the course ECON ECON taught by Professor Shomali during the Spring '04 term at University of California, Berkeley.

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Economics 100B - 28 (4-26-2007) - Economics 100B Professor...

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