Dynamic models student (1)

Dynamic models student (1) - Click to edit Master subtitle...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Click to edit Master subtitle style Dynamic Aggregate Demand and Aggregate Topics how to incorporate dynamics into the AD-AS model we previously studied how to use the dynamic AD-AS model to illustrate long-run economic growth how to use the dynamic AD-AS model to trace out the effects over time of various shocks and policy changes on Introduction The dynamic model of aggregate demand and aggregate supply gives us more insight into how the economy works in the short run. It is a simplified version of a DSGE model, used in cutting-edge macroeconomic research. (DSGE = Dynamic, Stochastic, Introduction The dynamic model of aggregate demand and aggregate supply is built from familiar concepts, such as: the IS curve, which negatively relates the real interest rate and demand for goods & services the Phillips curve, which relates inflation to the gap between output and its natural level, expected inflation, and supply shocks How the dynamic AD-AS model is different from the standard model Instead of fixing the money supply, the central bank follows a monetary policy rule that adjusts interest rates when output or inflation change. The vertical axis of the DAD-DAS diagram measures the inflation rate, not the price level. Subsequent time periods are linked together: Changes in inflation in one period alter expectations of future inflation, which Keeping track of time The subscript t denotes the time period, e.g . Yt = real GDP in period t Yt -1 = real GDP in period t 1 Yt +1 = real GDP in period t + 1 We can think of time periods as years. E.g ., if t = 2008, then Yt = Y 2008 = real GDP in 2008 The models elements The model has five equations and five endogenous variables: output, inflation, the real interest rate, the nominal interest rate, and expected inflation. The equations may use different notation, but they are conceptually similar to things Output: The Demand for Goods and Services ( ) t t t t Y Y r =-- + 0, output natural level of output real interest rate Negative relation between output and interest rate, same intuition as IS curve. Output: The Demand for Goods and Services ( ) t t t t Y Y r =-- + demand shock, random and zero on average measures the interest-rate sensitivity of demand natural rate of interest in absence of demand shocks, t t Y Y = when t r = The Real Interest Rate: The Fisher Equation 1 t t t t r i E + =- nominal interest rate expected inflation rate ex ante (i.e. expected) real interest rate increase in price level from period t to t +1, not known in period t expectation, formed in period t , of inflation from t to t +1 1 t + = 1 t t E + = Inflation: The Phillips Curve 1 ( ) t t t t t t E Y Y - = +- + previously expected inflation current inflation supply shock, random and zero on average indicates how much inflation responds when output fluctuates around its natural level Expected Inflation:...
View Full Document

Page1 / 55

Dynamic models student (1) - Click to edit Master subtitle...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online