ECO2004S Summary that will change everything! (1).pdf

Mployment which is a function if the catchal e that

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mployment which is a function if the catchal ) e that price level is inflation and if inflation + (m+z) – αu c year) d inflation, π e leads to an increase in actual k up will lead to an increase in wage determ mployment rate, u, leads to a decrease in in cific year m & z are constant s a –ve relationship ve conditions average inflation equals zero π e = 0 so that: m+z) – αu ationship between unemployment and infl ll variable (z) n equals: l inflation π mination (z) nflation o over time lation
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The Phillips curve fell a 1. An increa 2. Change I - Fo up in - Be wa Mutations of the Phillips cu Expectations of the Phi inflation as seen in: π t e = θ Where: Θ = the effect last years θ steadily increased sic As long as inflation is lo this year will not chang If inflation is high in th that is will be high this Now we have: π = π t e and π t e = θ so π = θ π t When theta = zero then When theta is positive rate and last year’s infl When theta = 1 unemp apart in 1970 for two reasons: ase in the oil price In the way wage setters formed expectation or the first time inflation rose steadily (inst p and down) price setters assume an inc nflation efore average inflation was zero, now avera as positive urve illips curve are now formed based on the p π t-1 s (t-1) inflation rate on this years (t) ce the 1970’s ow it is reasonable to assume that the price ge much from last year he previous years price setters and workers s year + (m+z) – αu π t-1 t-1 + (m+z) – αu n the original equation holds the inflation rate depends on both the un lation rate ployment affects the change in the inflation ns tead on going crease in age inflation previous years e level of s assume nemployment n rate: Historical assumption
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- High une - Low une Now there is a clear dif The Phillips Curve and Natu The natural rate of une actual inflation rate is e employment leads to decreasing inflation employment leads to increasing inflation fference in unemployment and the Change ural rate of unemployment employment = the unemployment rate such equal to the expected inflation rate e inflation rate h that the
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The change in inflation unemployment The natural rate of une inflation at zero u t < u n π t > π t-1 u t > u n π t < π t-1 MR employment = natura MR output = natural outp This is because when P > up Effects on the AS-AD Model Neutrality of money = t in the medium run π = In the medium run: - Output (Y) re - Price level mo CHAPTER 9: THE CRISIS Sequence of events Low interest rates in Mortgage lenders, lend US housing prices start Borrowers defaulted an Mortgage’s were over p n depends on the difference between actual employment is the unemployment rate requ al unemployment put > P e price setters assume an increase in prices l the rate of inflation is equal to the rate of m = gM eturn to Y n ove proportional to the change in nominal S ncrease borrowing demand for houses d at low credit ratings (subprime mortgage ted to fall in 2006
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