Topic 23 Inflationary Expectations
Event #3: A Positive AD Shock
Suppose there is a temporary increase in the aggregate demand parameter
The AD curve will shift out.
Prices increase.
The aggregate demand shock implies that booms are matched by recessi
Topic 21 Using the Short-Run Model
The Volcker Disinflation(
Reducing the level of inflation requires a sharp reduction in the rate of money
growtha tight monetary policy.
Because of the stickiness of inflation The classical dichotomy is unlikely to
hol
Topic 22 The AS/AD Framework
Topics
Monetary policy rule
Leads to aggregate demand (AD) curve
Phillips curve leads to aggregate supply (AS) curve
AD and AS curves represent an intuitive version of the short-run model
High short-run output leads to an
Topic 20 Monetary Policy
The short-run model summary:
Through the MP curve
the nominal interest rate determines the real interest rate
Through the IS curve
the real interest rate influences GDP in the short run
The Phillips curve
describes how booms
Topic 24 The Great Recession and the Short Run Model
Incorporating financial friction
Real interest rate at which firms can borrow=Real federal funds rate+Financial
friction(
During normal times
we assume Financial friction = 0.
During a financial cris