Ch9.1 - 1 Chapter 9 Inflation, Activity, and Nominal Money...

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1 Chapter 9 Inflation, Activity, and i l M G t h Nominal Money Growth
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Output Growth, Unemployment and Inflation 1
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. troduction 1.1 Introduction 3 ± This chapter builds on three relations between utput, unemployment and inflation. output, u e p oy e t a d at o ± Okun’s Law shows how output growth affects the hange in unemployment change in unemployment. ± The Phillips curve shows how unemployment ffects the hanges in inflation affects the changes in inflation. ± The aggregate demand relation relates output growth, nominal money growth and inflation.
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troduction Introduction 4 Figure 9 - 2 Output Growth, Unemployment, Inflation, and Nominal Money Growth
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otes: Approximations Notes: Approximations 5 ± The growth-of-a-product rule. The growth rate of a product is equal to the sum of the growth rates of its omponents components. Eg. z=xy g z g x + g y ± The growth-of-a-quotient rule. The proportional hange of a quotient is equal to the difference change of a quotient is equal to the difference between the proportional changes of its components. Eg. z=x/y g z g x -g y
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otes: Approximations Notes: Approximations 6 ± The growth-of-a-power rule. The proportional hange of a quantity raised to a power is equal to c a ge o a qua t ty a sed to a po e s equa to the proportional change in the quantity times the ower to which it is raised. p Eg. z=x y g z yg x
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1.2 Relationship between Output Growth to Unemployment Change 7 ± The production function takes the form: Y=AN. ± In chapter 6, we assumed that technology is fixed. That is, A=1. Therefore, Y=N. ± Using the growth-of-a-product rule, the growth rate of utput can be expressed as: output can be expressed as: Eq(1) N N A A Y Y Δ + Δ = Δ ± Since the technology is fixed, A/A=0. Therefore, ) q N Y Δ Δ ± This equation tells that changes in output leads to equal hanges in employment. For example, 1% increase in (2) Eq N Y changes in employment. For example, a 1% increase in output leads to a 1% increase in employment.
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Relationship between Output Growth to Unemployment Change 8 ± In chapter 6, we also assume that the labor force (L) is constant. rom q ) after some steps we obtain ± From Eq (1), after some steps, we obtain Eq(3) N u Δ = Δ (See Appendix.) N ± Movements in employment are reflected in opposite movements in unemployment. For example, a 1% crease in employment leads to a 1% ore increase in employment leads to a 1% (more precisely, 1-percentage-point) decrease in unemployment.
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Relationship between Output Growth to Unemployment Change 9 ± From Eq (2) and Eq (3), we obtain - =- q ) u t u t-1 g yt Eq (4) ± The change in the unemployment rate should e equal to the growth rate of output. be equal to the growth rate of output. ± For example, a 4% decrease in output growth ads to a 4% increase in unemployment rate. leads to a 4% increase in unemployment rate.
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.3.1 Okun’s Law 1.3.1 Okun s Law 10 ± The actual relation between output growth and the change in the unemployment rate is known as Okun’s law.
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This note was uploaded on 02/19/2011 for the course ECON 1021 taught by Professor Kokwanwai during the Fall '08 term at CUHK.

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Ch9.1 - 1 Chapter 9 Inflation, Activity, and Nominal Money...

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