# Gordon_Answers11e_ch08 - Chapter 8 Inflation Its Causes and...

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Chapter 8 Inflation: Its Causes and Cures 85 Section 8-6 has remained more or less same as in 10th edition. Section 8-7 has been changed moderately. The IP Box has been updated with newer data and graphs. Figure 8-8 has been eliminated. Section 8-8 case study in 10th edition has been eliminated completely, and the rest of the sections have been renumbered. The new Section 8-8 explains the supply shocks, and this section has gone through some major changes as the textual explanation has been expanded and new topic box has been added. Section 8-9 has not changed much apart from some tweaking of words. In Section 8-10, the old case study “The Goldilock Economy: Why Inflation Was so Low in the Late 1990s” has been replaced with a new case study “Why Did Inflation Creep Up After 2003?” Sections 8-11 and 8-12 have not changed that much apart from the figures. Figure 8-12, a graph of the unemployment rate against the output ratio, has been updated for the period 1965–2004 with a new explanation for the perpendicular dashed line. Figure 8-13, showing the history of the unemployment rate and the inflation rate, has been updated with a new diagram. In the Summary section, a new number 7 is added and the rest are renumbered. Appendix to Chapter 8, titled “The Elementary Algebra of the SP-DG Model” contains minor changes. ± Answers to Questions in Textbook 1. The output ratio and the rate of inflation both rose from 1965–69, from 1976–78, and from 1987–89. They both declined from 1982–83. The output ratio fell and the inflation rate rose from 1973–75 and again from 1979–81 and in 2003–2004. The output ratio rose and the inflation rate fell in 1984 and again from 1996–97. 2. Both the SAS curve and the SP curve are supply curves; that is, they relate a price variable to the amount of output that producers are willing to produce. The SAS curve shows the relationship of the price level to output. The SP curve shows the relationship between the change in the price level (the inflation rate) and the level of output. 3. a. An increase in money supply growth increases the rate of nominal GDP growth. This causes the economy to experience some combination of higher real GDP and higher inflation, moving it up along a given SP curve. b. An increase in the expected inflation rate causes the SP curve to shift upward. c. A decrease in production costs associated with technological improvement causes a downward shift of the SP curve. d. A decrease in nominal GDP growth has the opposite effect of (a). The economy experiences some combination of lower real GDP and lower inflation, moving it down along a given SP curve. 4. When the equilibrium real wage is constant and output is at the natural rate, the nominal wage will be increasing at the same rate as the inflation rate. If output is greater than the natural rate and actual inflation exceeds expected inflation, then the actual real wage would be falling. In this case, we would expect workers to try to increase the rate of growth of nominal wages.

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## This note was uploaded on 09/04/2010 for the course ECON 311 taught by Professor Gordon during the Spring '08 term at Northwestern.

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Gordon_Answers11e_ch08 - Chapter 8 Inflation Its Causes and...

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