08_Lecture_Slides - Economics 104 Fall 2010 1 Models of...

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Unformatted text preview: Economics 104 Fall 2010 1 Models of Aggregate Demand and Supply Outline & Readings Standard model of AD & AS (Price and Output Model) — chapter 10. ADI & AS Model (Inflation and Output Model) — chapter 11 and Appendix. Economics 104 Fall 2010 2 ADI & AS Model: Inflation and Output Objective: a description (model) of inflation and output. Some key ideas: ◦ Inflation is slow to adjust ( intertial ) and depends upon expectations . ◦ Monetary policy: the central bank’s reaction function . ◦ Effects of aggregate demand and aggregate supply shocks. ◦ Costs and benefits of disinflation. Some perspective: ◦ Covers many of the same ideas as previous chapter but with different emphasis. ◦ Model is similar to previous chapter but distinct in its (i) focus on inflation and (ii) the role of monetary policy. Economics 104 Fall 2010 3 1. Inflation and Aggregate Demand — the ADI curve Previously ◦ Fixed price model: planned aggregate expenditure equal production (output) at a given price level P . ◦ AD curve: changes in price level changes aggregate demand (real balance effect; foreign trade effect). Aggregate Demand Inflation Curve: an inverse relationship between inflation and aggregate demand (which in short run is equal to output).- 6 π Output Y ADI Economics 104 Fall 2010 4 (a) The ADI curve slopes downwards because of the central bank’s policy reaction function : ◦ As inflation rises, the central bank raises policy interest rates fast enough to raise real interest...
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This note was uploaded on 01/28/2011 for the course ECON 104 taught by Professor Voss during the Winter '10 term at University of Victoria.

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08_Lecture_Slides - Economics 104 Fall 2010 1 Models of...

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