2010-ECON 202 L15 - ECON202 Viv Hall, SEF VUW L15 Short-run...

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ECON202 Viv Hall, SEF VUW L15 Short-run & medium-run movements in output & prices – closed economy AD-AS 1. Some Key Points 2. Illustrating dynamic adjustments from the short-run through to the medium-run outcome 3. Short-run and medium-run effects of monetary policy 4. Short-run and medium-run effects of fiscal policy Blanchard 5/e, chapter 7, especially sections 7-3 to 7-5, 7-7
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ECON202 Viv Hall, SEF VUW Some Key Points : (1) Recall the closed economy general equilibrium AD-AS model model: (+) (+) (-) AD Closed Y = Y( M/ P , G, T ) (+) (+) ( - ) (+) AS Closed P = P e (1 + μ ) F(1 - ( Y /L), z ) When P e is “slow” to adjust , Y can vary from its natural level, Y n ; adjustment of P e drives economy back to the natural level . Examine the implications of price expectation errors ( P P e ), and why this is necessary for Y to deviate from its natural level.
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ECON202 Viv Hall, SEF VUW Some Key Points : (2) Short-run effects of monetary and fiscal policy - these shocks can cause Y to vary about Y n Blanchard’s medium-run effects of monetary policy on Y n are “ neutral Blanchard’s medium-run effects of fiscal policy on Y n depend on whether the particular (supply-side) fiscal policy can influence Y n .
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ECON202 Viv Hall, SEF VUW Illustrating dynamic adjustments, from the short-run through to the medium-run : (1) Two important ways of helping to explain “sticky” price and wage adjustments involve: - slow adjustment of W , due to fixed term contracts and costs of renegotiating wage contracts; and - price expectations, P e , being slow to adjust, e.g. backward- looking Blanchard emphasises the second aspect, and assumes P e t = P t-1 i.e. backward looking price level expectations The AS function then becomes : AS Closed :P = P t-1 (1 + μ ) F(1-(Y/L), z )
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ECON202 Viv Hall, SEF VUW Illustrating dynamic adjustments : (2) An expansionary shock to AD via IS LM n (P t+n ) i n LM 1 (P t ) LM 0 (P t-1 ) i 0 IS 0 IS 1 Y P AS n (P e t+n = P t+n ) P t+n P t 0 (P e t = P t-1 ) P t-1 AD 1 0 Y n Y
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This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.

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2010-ECON 202 L15 - ECON202 Viv Hall, SEF VUW L15 Short-run...

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