2009-13 - ECONOMICS 100B Professor Martha Olney 11/12/09...

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ECONOMICS 100B Professor Martha Olney 11/12/09 Lecture 23 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Outline MPRF o Shifts and Slope MPRF and PC Equilibrium Using MPRF and PC Model Expectations MPRF Shifts and Slope When we were here the last time, we ended with the Monetary Policy Reaction Function. Here’s what we know: The Taylor Rule tells us that the Fed will set some baseline level of interest rate. In addition, the Fed will react to the difference between the actual and target inflation rate. ݎൌݎ ൅ݎ ሺߨ െ ߨ The IS equation tells us the amount of output that will be produced in an economy relative to the interest rate in the economy. ܻൌ ܣ݋ 1െܯܲܧ ሺܫ ൅ܺ ߝ ሻ ൈݎ 1െܯܲܧ Okun’s Law tells us the amount of unemployment relative to the output gap in the economy. ݑൌݑכ൅0 .4 ܻכെܻ ܻ We also defined that when ݎൌݎ , output will equal Y 0 and unemployment will equal u 0 . We then combined these three equations to form the MPRF. ݑൌݑ ൅ቂݎ ൈሺܫ ൅ܺ ߝ ሻൈ ଵିெ௉ா ଴.ସ ௒כ ቃሺߨെߨ ݑൌݑ ൅߶ሺߨെߨ Note that phi has four components. ݎ is the Fed’s reaction to a change in the inflation rate. ܫ ൅ܺ ߝ is the change in gross exports and investment in response to a change in the interest rate. ଵିெ௉ா is the multiplier. ଴.ସ ௒כ is the constant from Okun’s Law. When we draw the MPRF, unemployment is on the horizontal axis and inflation is on the vertical axis. One of the points on this line is u 0 and π t . When trying to figure out what shifts the MPRF versus what moves us along the MPRF, we need to look back at our equation and break it down a bit. I know that MPRF will shift if there’s a change in u 0 . I know that I will have a change in slope if ߶ changes. I also know that if π t changes, there will be a shift in the MPRF. But there are many components of u 0 and ߶ . So I I will blow this equation up into its many component pieces to show us what shifts and what changes the slope of the MPRF. ݑൌݑ ൅߶ሺߨെߨ ݑൌቈݑכ൅ 0.4 ܻכ ቆܻ כ െ ܣ െሺܫ ݎ ൅ܺ ߝ ߝ ݎ ሻݎ 0 1െܥ ܻ ሺ1െݐሻ൅ܫܯ ܻ ቇ቉ ൅ݎ ߨ ሺܫ ݎ ൅ܺ ߝ ߝ ݎ ሻൈ 1 1െܥ ܻ ሺ1െݐሻ൅ܫܯ ܻ ଴.ସ ௒כ ൈሺߨെߨ
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Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 11/12/09 D O
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2009-13 - ECONOMICS 100B Professor Martha Olney 11/12/09...

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