Econ+310+Winter+2010+Topic+7

Econ+310+Winter+2010+Topic+7 - Economics 310 Money and...

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Economics 310 Money and Banking Topic 7 Inflation
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2 Lecture 1 Reading Chapter 22 Chapter 24 Bernanke “Price Stability” Speech
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3 Lecture 1 Inflation What is inflation? Why does inflation arise? What can be done about it? Must develop a model that allows the aggregate price level to be determined endogenously
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4 Lecture 1 Aggregate price in the IS-LM model Role of the aggregate price (P) in IS-LM is to help determine the real money supply LM: M/P = f(i, Y) Changes in P would: Shift LM Generate changes in aggregate demand Generate equilibrium changes in Y P is an exogenous variable in IS-LM Firms supply output infinitely elastically at the given price no pressure for that price to change
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5 Lecture 1 Endogenizing Price Familiar supply story: prices respond to excess supply/excess demand for goods Requires some specification of supply behavior IS-LM: supply is infinitely elastic Never any pressure for prices to change What if supply is not infinitely elastic?
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6 Lecture 1 Factor Markets Prime example: Labor Market Supply depends on Nominal factor prices Output prices Preferences Demand depends Nominal factor prices Output prices Technology Observe the importance of real factor prices
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7 Lecture 1 Labor market L W/P L d L s L* W 0 /P 0  = w* L D W 0 /P 1  < w* Excess Demand 1 1 L S
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8 Lecture 1 Price Flexibility
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Econ+310+Winter+2010+Topic+7 - Economics 310 Money and...

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