Econ+102+lecture+9%2C+2-2-12+-+Inflation+and+unemployment copy

Econ+102+lecture+9%2C+2-2-12+-+Inflation+and+unemployment copy

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Lecture 9: Ch. 8 –  Inflation and Unemployment Econ 102, Fall 2011 2/2/2012 Required reading : Ch 8: (all) pp. 199- 220
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Outline 1. Inflation 2. Costs of inflation a. Reallocation and inflation 3. Unemployment 4. Other labor market statuses 5. The natural rate hypothesis 2/2/2012
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On to short run analysis…  We discussed the measurement of inflation in Ch. 7, prior to launching into growth. Notice that the growth model had no discussion of prices 1. Concern was aggregate output 2. If all markets clear (as we assume in the LR), then changes in aggregate prices are purely nominal: meaningless. Further, there was no discussion of unemployment . Again, market clearing implies no unemployment. By assumption all existing resources were used in aggregate production 2/2/2012
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On to short run analysis…  Krugman calls inflation and unemployment the “two great evils” of the business cycle. Luckily (for reasons explored in depth in Ch. 16), they tend not to come all at once:
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Inflation Recall and 100 year base in basket market of cost year t market of cost P t x = 100 P P P 1 1 2 t x - = π
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Inflation Inflation : the rate at which the aggregate price level rises Disinflation : a decrease in the (still positive) rate of inflation Deflation : the rate at which the aggregate price level decreases  negative inflation Inflation/deflation describes a rate of change: the price level is irrelevant when measuring inflation Suppose we took every transaction (including those in factor markets) and multiplied the prices by 1000 Q: Are you worse off? 2/2/2012
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Inflation Nominal wage = w Real wage = = nominal wage, deflated to base-year price level (= 100) As long as prices and wages rise together, inflation does not “make you poorer” If wages don’t rise with inflation, then inflation whittles away your real ability-to-buy Then supposing wage growth matches inflation why do we care about inflation? What’s so bad about it? 2/2/2012 100 x P w t t 100 1000 * 1000 * x P w t t =
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Costs of inflation Firstly, it’s worth remembering that inflation is an average of sorts – price changes times how “important” that good is. “Importance” is measured by the % of income devoted to spending on that good (its expenditure share ) Some items’ prices rise quickly, some fall. People who mostly consume goods with fast-rising prices can afford less stuff. Consumers of goods with falling prices can buy more.
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This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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Econ+102+lecture+9%2C+2-2-12+-+Inflation+and+unemployment copy

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