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Note202_08

# Note202_08 - Macroeconomics Theory and Policy Modified...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 Masoud Anjomshoa 1 Modified Phillips Curve: If unemployment rate goes below the natural rate of unemployment rate, the increase in price level is accelerating, i.e. inflation rate is increasing, and vice versa. = = π = π + μ + α π = π n e t t t e t t u u Y Y : Run Medium ) z ( u : Curve Phillips ) u u ( : Curve Phillips Augmented n Expectatio n t e t t α = π π If unemployment rate is equal to natural rate of unemployment rate, the inflation rate is fixed. = π π = π π = π π %) 4 . 9 u ( 53 . 0 : Europe %) 2 . 6 u ( 72 . 0 : . S . U %) 6 . 8 u ( 50 . 0 : Canada t 1 t t t 1 t t t 1 t t 1 t e t : Suppose π = π Masoud Anjomshoa 2 If output/income, Y, is fixed (for example in medium run): If the Central Bank continuously increases money supply by 5% per year, the only outcome will be 5% inflation rate, given fixed output. = + + T , G , P M Y Y : AD P P M M Y Y t t t t t t Δ Δ = Δ = + t t P M Y Y : fixed kept are T and G If Aggregate Demand:

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Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 Okun’s Law: Okun’s Law: The negative relationship between growth rate of real output and change in unemployment rate: ) g g ( u u y yt 1 t t β = g yt u t- u t-1 %) 7 . 3 g ( 33 . 0 u u : Canada For yt 1 t t = g y : Normal growth rate.
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Note202_08 - Macroeconomics Theory and Policy Modified...

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