MacroEcon Chapter 16

MacroEcon Chapter 16 - Chapter 16: Inflation and Monetary...

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Chapter 16: Inflation and Monetary Policy I. The Objectives of Monetary Policy 1913: Fed’s responsibility- stability of banking system lender of last resort (inject reserves into banking system) alleviate financial panics 1950-60’s: responsibility= keep interest rate low and stable 1978: Achieve love, stable rate inflation and full employment of labor force A. Low Stable Inflation why keep it low? If high: people use up time; we could’ve made resources Fed keeps it stable year to year. Why? Unstable- difficult to predict Risk of lending/borrowing; interferes long run financial plan Inflation higher than expected: lenders to borrowers Inflation lower than expected: borrowers to lenders B. Full Employment full employment: unemployment is at normal levels frictional-> not a problem structural (micro): very serious- mismatch cyclical: macroeconomics: occurs during recession
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full unemployment: in macro, means absence of cyclical 2 reasons concerned opportunity cost: output unemployed could’ve made represents social failure if unemployment falls too low GDP is over potential- self correcting mechanism kicks in AS shift increases, increases price level Long run- lead to inflation I) Natural Rate of Unemployment when the unemployment rate s below the natural rate, GDP is greater than potential output. The economy’s self correcting mechanism will then create inflation. When the unemployment rate is above the natural rate, GDP is below potential output. The self-correcting mechanism will then put down-ward pressure on the price level. Natural Rate of Unemployment Unemployment rate when there is no cyclical unemployment Determines by: slow moving forces in economy How workers move from job to job Efficiently unemployed can search for jobs Skills unemployed match skills of employed Can be influenced by government policies Why use the term natural? Not much macroecon policy can do about natural rate
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MacroEcon Chapter 16 - Chapter 16: Inflation and Monetary...

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