Chapter 21 - Chapter 21 Output, Inflation, and Monetary...

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Chapter 21 Output, Inflation, and Monetary Policy I. Output and inflation in the long run a. Potential output i. Current output equals potential output ii. Potential output is full-employment output iii. Not a fixed level iv. Tends to rise over time v. Current output above potential: expansionary output gap vi. Current output falls below potential: recessionary output gap b. Long-run inflation i. Inflation equals money growth minus growth in potential output II. Monetary policy and the dynamic aggregate demand curve a. With low inflation, restraining money growth is not a central short-run policy objective b. Manipulate interest rates to keep inflation low and close gap between current and potential output c. Nominal interest rate equals real interest rate plus expected inflation d. Aggregate expenditure and the real interest rate i. Aggregate expenditure = consumption + investment + government purchases + (exports – imports) ii. When real interest rate rises consumption, investment, and net exports fall iii. Rise in real interest rate reduced the level of aggregate expenditure
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This note was uploaded on 05/10/2010 for the course ECO 3223 taught by Professor Staff during the Spring '08 term at University of Central Florida.

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Chapter 21 - Chapter 21 Output, Inflation, and Monetary...

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