Download G - Madison County Schools

ME = 1/MPS
MT=MPC/MPS
Base year[$50/$50=1x100=100]
Formulas
$46/$50x100=92[deflation of 8%]
Price of Market Basket(2001)
[nominal GDP]
= Price of same Market Basket(1998)x100;
[GDP Deflator] in the base year (1998)
GDP Price Index
$64
[Real GDP] $50x100=128
[$64/128 x 100 = $50]
$6,737[1994]/126.1[1987($4,540)]x100 = $5,343 [+$803.]
“Real GDP deflates nominal GDP to actual value”[takes the air out of the nominal balloon]
Unemployment
Labor Force x 100 =
[Employed + unemployed]
unemployment rate;
5,655,000
140,863,000 x 100 = 4%
[135,208,000+5,655,000]
[2000]
Okun’s Law or GDP gap)=Unemployment Rate over 6% x 2%; 7.5%, so 1.5x2% = 3%.
Or, $3 billion GDP Gap[$100 billion nominal GDP x .03% = $3 billion].
(2000-later year)
(1999-earlier year)
[*Change/original x 100]
Current year’s index – last year’s index
172.2-166.6(5.6)
C.P.I. = Last year’s index(1999-earlier year) x 100; 166.6
x100 = 3.4%
_________________________
70
“Rule of 70” = % annual rate of increase (3%) = 23 years
“Real Income” measures the amount of goods/services nominal income will buy.
[% change in real income = % change in nominal income - % change in PL.]
5%
10%
5%
“Nominal”
Real GDP = Nominal GDP/Index X 100
“Real”
$9,299.2[1999]/104.77[1996] x 100 = $8,875.8 [So, +$1,062.6]
“Real GDP deflates nominal GDP to actual value” [takes the air out of the nominal balloon]
$5,250.8
$3,774.7
$5,671.8
4,848
4,839 108.1 x 100=$_____
3,492 117.0 x100=$_____
108.5 x 100=$_____
1. Using the above formula, what is the real GDP for 1994
if nominal GDP was $6,947 trillion and the GDP deflator was
126.1? ($6,611/$5,610/$5,509) trillion.
[$6,947/126.1 x 100 = $5,509 trillion
2. For 1996, what would real GDP be if nominal GDP were
$7,636 trillion and the GDP deflator were 110.2?
($6,929/$9,628/$6,928).
[$7,636 trillion/110.2 x 100 = $6,929 trillion]
Unemployment
5,655,000
Unemployment Rate = Labor Force x 100; 4.0% = 140,863,000 x 100
[Employed + unemployed]
[135,208,000+5,655,000]
6 %.
In Forney, 42 are unemployed & 658 are employed. The unemployment rate is __
5
One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%.
1. If the total population is 280 million, and the civilian labor force
includes 129,558,000 with jobs and 6,739,000 unemployed but
looking for jobs, then the employment rate would be ____%.
4.9
[6,739,000/136,297,000 x 100 = 4.9%]
AD1
AD2
3%
AS
FE GDP “Bull’s Eye”
1%
5% Cyclical(“real”) Unempl.11% 6% [Frictional+Structural]
10%[5%x2=10%] Negative Gap
Y*F
YR
[Okun’s Law]
Arthur Okun
YP
YA YA
[GDP Gap = unemployment rate over 6% x 2]
$9 Tr. $10 tr.
E2 Recessionary Gap(YR)
Potential output ($10) exceeds actual output($9).
Actual unemploy. rate(11%) exceeds Potential unemp. rate(6%).
Unemployment [Let’s say that Nominal GDP is $100 billion.] [And if it were $200 billion?]
Rate
1.
2.
3.
4.
1
7%; real unemployment is __%;
8%; real unemployment is __%;
2
13%; real unemployment is __%;
7
14%; real unemployment is __%;
8
% gap is ___
2 bil.
2 %; output forgone is ___
% gap is ___
4 %; output forgone is ___
4 bil.
% gap is 14
___ %; output forgone is 14
___ bil.
% gap is 16
___ %; output forgone is ___
16 bil.
[Change/Original X 100 = inflation]
So, 3.3% increase in Social
Security benefits for 2007
(2006-later year)
(2005-earlier year)
Current year’s index – last year’s index
199.1 – 192.7 [6.7]
C.P.I. = Last year’s index(2006-earlier year) x 100; 192.7
x100 = 3.3%
130.7-124.0(6.7)
116-120(-4)
333-300(33)
11%
124.0 x 100 = ____
300 x 100 = ____
-3.3%
5.4% 120 x 100 = ____
1.The CPI was 166.6 in 1999 and 172.2 in 2000.
Therefore, the rate of inflation for 2000 was
(2.7/3.4/4.2)% [5.6/166.6 x 100 = 3.4%]
2. If the CPI falls from 160 to 149 in a particular
year, the economy has experienced (inflation/deflation)
of (5/4.9/6.9)%. [-11/160 x 100 = -6.9%]
3. If CPI rises from 160.5 to 163.0 in a particular year,
the rate of inflation for that year is (1.6/2.0/4.0)%.
Consumers in this economy buy only two goods–hot dogs & hamburgers.
Step 1. Fix the basket. What percent of income is spent on each.
Consumers in this economy buy a basket of:
4 hot dogs and 2 hamburgers
Step 2. Find the prices of each good in each year.
Year
Price of Hot Dogs
Price of Hamburgers
2001
$1
$2
2002
$2
$3
Step 3. Compute the basket cost for each year.
2001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8
2002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14
Step 4. Choose one year as a base year (2001) and compute the CPI
2001 ($8/$8) x 100 = 100
2002 (14/$8) x 100 = 175
Step 5. Use the CPI to compute the inflation rate from previous year
2002 (175/100 x 100 = 175%) or to get actual % (175-100)/100 x 100 =75%
Or, Change
$14-$8 ($6)
Original
$8
x 100 = 75%
(42%) 18. Suppose that a typical consumer buys the following quantities of these
three commodities in 2000 and 2001.
Commodity
Food
Clothing
Shelter
Quantity
5 units
2 units
3 units
2000 per Unit Price
$6.00
$7.00
$12.00
2001 per Unit Price
$5.00
$9.00
$19.00
Which of the following can be concluded about the CPI for this individual from
2000 to 2001?
a. It remained unchanged.
c. it decreased by 20%
b. It decreased by 25%.
d. It increased by 20%
e. It increased by 25%.
(Answer)
Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36,
for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)]
Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57,
for dollar value of $100. CPI =125
Change
Original =
$100-$80 [$20]
$80
x 100 = 25%;
so the CPI for this individual is 25%.
70
__________________________
“Rule of 70” = % annual rate of increase (3%) = 23 years
[Inflation (prices to double)]
70
70
70
[Investments to double]
6 years 9 = _____
8 years [GDP (standard of living) to double]
7 years 12 = _____
10 = ______
70
[Nominal income – inflation rate = Real Income]
16%
Nominal
Income
6%
Inflation
Premium
=
10%
Real
Income
APC
and APS
APC - percentage of income (“Y”) consumed.
APS – percentage of income (“Y”) saved.
APC = C/Y(DI)=$48,000/$50,000 = .96
1
APS = S/Y(DI)= $2,000/$50,000 = .04
APC = C/Y=$52,000/$50,000 = 1.04
1
APS = S/Y= -$2,000/$50,000 = -.04
“Econ,
Econ,
APS=S/Y
“High maintenance
Econ teacher”
What in the
world is
AE?
AE=GDP
APC=C/Y
MPC, MPS, & the Multiplier
ME=1/MPS
MPC - % change in Y consumed.
MPS - % change in Y saved.
MPC = C/ Y = $750/$1,000 = .75
MPS = S/ Y = $250/$1,000 = .25
Multiplier [1/MPS]=1/.25=$1/.25 = “ME” of 4
[MPC is important for G in policy making decisions.]
*The ME is the reciprocal of the MPS.
The “ME” works like a concentric circle.
$20 billion “G”
[with ME of 4]
15 bil.
11.25 bil.
8.5 bil.
ME
MPC
.90
.80
.75
.60
.50
1/MPS
1/.10
1/.20
1/.25
1/.40
1/.50
=
ME
= 10
= 5
= 4
= 2.5
= 2
MT
MPC
.90
.80
.75
.60
.50
= MT
-MPC/.10 =
-9
-MPC/.20 =
-4
-MPC/.25 =
-3
-MPC/.40 = -1.5
-MPC/.50 =
-1
-MPC/MPS
When the G gives a tax cut, the MT is smaller than the ME
because a fraction [MPS] is saved and only the MPC is
initially spent. So, the MT = -MPC/MPS.
The ME, MT, & MBB Multipliers
ME [C, Ig, G, or Xn] = 1/MPS = 1/.25 = 4
So, G increase of $20 bil. will incr Y by $80 bil. [$20x4=$80]
And a G decrease of $20 bil. will decrease Y by $80 bil. [-$20x4=-$80 bil.]
MT = -MPC/MPS = -.75/.25 = -3
So, T decrease of $20 bil. will incr Y by $60 bil.[-$20x-3=$60]
And a T increase of $20 bil. will decr Y by $60 bil. [$20x-3=-$60]
MBB
=
1X
(
G)
So, an increase in G&T of $20 bil. will incr Y by $20 bil. [1X$20=$20]
And a decrease in G&T of $20 bil. will decr Y
by $20 bil.[1X-$20=-$20]
Any increase in expenditures x the M will increase GDP.
Any decrease in expenditures x the M will decrease GDP.
Dennis Rodman deposits $1 with A 10% RR
Rodman’s
.10
RR
90 cents
Excess Reserves
Total (Actual) Reserves
One Dollar
One bank’s loan becomes
another bank’s DD.
PMC = M x ER, so 10 x .90 =$9
TMS = PMC[$9] + DD[$1] = $10
[MS = Currency + DD of Public]
Rodman’s Bank Borrows $1 From The Fed [10% RR]
Rodman’s Bank
0
Fed
One Dollar
RR Excess Reserves
Total(Actual) Reserves
One Dollar
PMC = M x ER, so 10 x $1 = $10
TMS [$10] = PMC[$10]
[MS = Currency + DD of Public]
MULTIPLE DEPOSIT EXPANSION PROCESS
RR= 20%
Amount bank
Bank
Acquired reserves Required
and deposits
reserves
A
$100.00
B
80.00
C
64.00
D
51.20
E
40.96
32.77
Susie RahRah F
G
26.22
I’m doing
H
20.98
the econ
rap.
I
16.78
J
13.42
Ronald McDonald K
10.74
L
8.59
M
6.87
N
5.50
Other banks 21.97
Paris Hilton
Reese Witherspoon
$20.00
16.00
12.80
10.24
8.19
6.55
5.24
4.20
3.36
2.68
2.15
1.72
1.37
1.10
4.40
P MC in the banking system [MxER]
Excess
reserves
$80.00
64.00
51.20
40.96
32.77
26.22
20.98
16.78
13.42
10.74
8.59
6.87
5.50
4.40
17.57
can lend - New
money created
$80.00
64.00
51.20 1st
40.96 10
32.77 $357
26.22 of
20.98 the
16.78 $400
13.42
10.74
8.59
6.87
5.50
4.40
17.57
$400.00
TMS = $500.00
C
A
P
I
T
A
L
G
O
O
D
S
A
B
G
More or better resources or better technology
C
F
D
E
Consumer Goods
40. At what letter is there unemployment [recession]? F
41. What letters represent resources being used in their
most productive manner? [full employment,
full production, and best available technology] A,B,C,D,E
42. What letter represents an improvement in technology,
therefore a new PPC frontier line? G
43. The (straight line/curve) illustrates the “law of increasing cost”?
44. The (straight line/curve) illustrates the “law of constant cost.”
45. At what letter would there be the most economic growth in
the future if a country were producing there now? A
46. What is the opportunity cost when moving from “C” to “D”; Capital
when moving from E to B; Consumer
& do we have to give anything up when moving from F to D? no
Appreciation of the Dollar
Increase in taste for U.S. goods
Increase in U.S. Interest Rates
Decrease in U.S. Price Level
Decrease in U.S. Growth Rate
The Market for Dollars
Yen Price of Dollar
Exchange Rate: $1 = ¥100
P
Decrease in U.S. Currency Price
D1$
D2
Y looking for $’s
Y150
Y100
S$
$’s looking for Y
E2
D
A
Yen
depreciates
Yen
E1
appreciates
Y50
E3
Depreciation of Dollar
Decrease in Taste 0
Decrease in In. Rates
Increase Price Level
Increase Growth Rate
Increase in Currency Price
D
D3
Q
A
Quantity
E of Dollars
Appreciation/Depreciation
[Exchange Rate:
Price D1$
S
D2
$
Japan will supply
less yen for dollars. ¥/$
S2¥ ¥150
$/¥ D¥
S1¥
$1.50
$1
.50
S2¥
¥100
E2
D
A
E2
¥ looking for $’s
D
A
Yen
depreciates
D
¥100
appreciates
¥50
D # of ¥ A
Japan will supply
more yen for dollars.
X M D
+
+
+
+
+
$’s looking for ¥
U.S. will supply more $s for ¥.
E2
S$
S$
¥/$ D$
¥150
E2
S$
E1
Yen
-
$1 = Y100]
A
E2
¥50
E3
D # of Dollars
D3
U.S. will supply fewer $s for ¥.
Quantity of Dollars
Taste
A M X
[products/assets]
Interest Rates
Price
A
Level
Growth Rate
Currency Price
+
+
+
+
+
-
AD
[CIG-X]
[REP]
SRAS
[Production cost]
Price
Level
PLe
Ye
Real Domestic Output
[caused by “C+Ig+G+Xn”]
AD1
AD2
LRAS
Price Level
Increase in AD
1. Increase in Consumption
2. Increase in Investment
3. Increase in Gov. spending
A. On military spending
B. On the infrastructure
C. On health care
4. Increase in Net exports [Xn]
A. Dollar depreciates
B. Trade partners Y’s rise
YR
YF
Real Domestic Output, GDP
SRAS
[caused by “C+Ig+G+Xn”]
AD2
AD1
LRAS
Price Level
Decrease in AD
1. Decrease in Consumption
2. Decrease in Investment
3. Decrease in Gov. spending
A. On military spending
B. On the infrastructure
C. On health care
4. Decrease in Net exports [Xn]
A. Dollar appreciates
B. Trade partners Y’s fall
YR
YF
Real Domestic Output, GDP
SRAS
[caused by “REP”]
Increase in AS [“REP”]
Resource Cost [domestic]
a. More land, labor,
capital & entrepreneurs
b. # of sellers increase
Resource Cost [overseas]
PL
c. Imported inputs decrease in
price
d. Dollar appreciates
Environment [legal-institutional]
a. Increase in subsidies
b. Decrease in bus. regulations
c. *Decrease in business taxes
Productivity
Increase in productivity
AD
AS1
AS2
RGDP
[caused by “REP”]
Decrease in AS [“REP”]
Resource Cost [domestic]
AD
AS3
AS1
a. Land, labor, & capital
become more scarce
b. Number of sellers decrease
Resource Cost [overseas]
PL
c. Imported inputs increase
in price
d. Dollar depreciates
Environment [legal-institutional]
a. Decrease in subsidies
b. Increase in bus. regulations
c. *Increase in business taxes
Productivity
Decrease in productivity
RGDP
AD
PL1
PL2
PL
AQD
AQD1
AQD2
PL1
PL2
AS
[DIRECT ]
AQS2 AQS1
C
Consumption
Mariah Carey Concert
1. “Non price Level” change-either C, Ig, G, or Xn
2. “Whole AD curve” shifts
[There is a change in AQD but it is not caused by
a change in price level.]
AD2
AD
1
AD3
Ig
G
PL
Let there be more
military weapons
XN
Chevy
Ferrari
[Exports-Imports]
AQD3 AQD1 AQD2 RDO
Change in AS
1. “Non price level change”. Either R,Anything
E, or P that lowers
2. “Whole AS curve” shifts.
the cost of production
shift AS
right.
3. AQS changes but is not caused bywill
a change
in PL
AS Shifters(REP)
1. Resource cost
2. Environment [legal-institutional
Increase in the
environment for businesses change,
availability
of Resources
affecting production
costs
[subsidies, bus. taxes, regulations]
3. Productivity
PL
1. Lower business taxes
2. Decrease in regulations
3.
AS3 AS1 AS2
So – AS Shifters are
REP
You save money. We don’t require
dental or medical insurance. You
don’t have to pay us a pension
and we don’t take sick days. And
– we can dance.
Increase in subsidies
Environment
[Legal-institutional]
AQS3 AQS1 AQS2
Increase in Productivity
AE[C+Ig+G]
AD2 LRAS SRAS
S
AE2[C+Ig+G]
AE1[C+Ig]
AD1
PL
PL
o
45
YR Y*
Real GDP
YR Y*
Real GDP
AE[C+Ig+G]
LRAS SRAS
AD1
S
AE1[C+Ig1]
AE2[C+Ig2]
AD2
PL
PL
o
45
Y* YI
RGDP
Y* YI
RGDP
Weaknesses [Limitations] of the AE Model
•
•
•
•
•
Does Not Show Price Level Changes
Does not show Demand-Pull Inflation
Does Not Deal With Cost-Push Inflation [Stagflation]
It ignores premature demand-pull inflation [Inflation just before FE GDP]
It does not allow for “self-correction”
AE[C + Ig]
Multiplier=4
(billions of dollars)
AE[C+Ig] [“Basic” or “Simple” economy]
S
Private - Closed
Consumption
Equilibrium
470
Ig = $20 Billion
450
390
+20 +60 more
C =$450 Billion
[increase 80]
370
45
o
C + Ig
o
Real GDP
GDP will increase by a “multiple” of 4 &
that is why it is called the “multiplier”.
370
390
410 430 450
470
490 510 530 550
AE [C+Ig+Xn] (billions of dollars)
(C[450] + Ig[20] +M[10] + X[10] = GDP [470])
$530
Private
510
490
470
Open
S
C + Ig+Xn
Consumption
Equilibrium
Ig = $20 Billion
450
430
410
C = $450 Billion
390
o
45
o
370 390 410 430 450 470 490 510 530 550
Real domestic product, GDP (billions of dollars)
$20 Billion Government Spending & Impact on Equilibrium Y
S
$20 bil. on National Defense $550
C + Ig + Xn + G
Government
Spending of
$20 Billion
C + Ig + Xn
Consumption
$470
Mixed - Open
$390
AE (billions)
Private-public - ROW
Increases Y by $80
[$20 x 4 = $80]
o
45 o
390
470
550
RGDP
Incr. T by $20 billion [MT = 3] Equilibrium GDP[-60]
S
C + Ig + Xn + G
Ca + Ig + Xn + G
$20 bil. incr in T $550
$490
Mixed-Open
-20 x 3 = -$60
o
45
o
$490
$550
RGDP
Real domestic product, GDP (billions of dollars)
[*Use this graph if there is a chg in savings by consumers or chg in fiscal policy]
Real Interest Rate, (percent)
[*Use
the Money Market graph when there is a change in MS]
D
Borrowers
1
D
S
2
Lenders
r= 8 %
E2
r= 6 %
E1
F1
Use the “real interest rate” with
LFM, because it is long-term.
Use “nominal interest rate” with
money market, as it is short-term.
Starting from a balanced budget, if the
G incr spending or decr T to get out of
a recession, they would now be running
a deficit and have to borrow, pushing
up demand in the LFM and increasing
the interest rate.
F
Quantity of Loanable
Funds
2
$2.2 T
$2 T
$2 T
G
T
Balanced Budget [G&T=$2 Tr.]
[*Use this graph if there is a chg in savings by consumers or chg in fiscal policy]
Real Interest Rate, (percent)
[*Use
the Money Market graph when there is a change in MS]
S1
D
Borrowers
1
Lenders
r= 6 %
E1
r= 4 %
E2
F1
S2
The following would cause an
increase in supply in the LFM
and lower real interest rates:
1. Fed increases MS
2. HH save more
3. Business save more
4. Government saves more
5. Foreigners save more here
F
Quantity of Loanable
Funds
2
Loanable Funds Market
Start from a
PL
Balanced Budget
G & T = $2 Trillion
$2.2 tr.
$2 tr.
G
$2 tr. PL2
T
SRAS
AD2LRAS
AD1
S
D1
r=8%
r=6%
F1 F2
“Now, this is better.”
“I can’t
get a job.”
PL1
Real In. Rate
[Incr G; Decr T][But we get negative Xn]
D2
E1
E2
YR YF
Real
$2.2 GDP
$2.2
G
AD
Y/Empl./PL;
I.R.
$1.8
$1.8
T
LFM
G
DI
C
AD
Y/Emp/PL; T
LFM
IR
Nominal Interest Rate
If there is a
RECESSION
MS will be
increased.
DM MS1 MS
2
8%
8
6%
6%
4%
4
0
PL
Buy
Money Market
AD
AD
1
2
0
AS
Investment
Demand
QID1 QID2
I want a job
as a Rockette
PL2
PL1
E2
E1
Real GDP
Fed
Buy
Bonds
DI
MS
YR
I.R.
Y*
QID
AD
Y/Emp/PL
PL
SRAS
Start from a
Balanced Budget
G & T = $2 Trillion
$2.2 T tril.PL1
$2
$1.8
tril.
tril..
G
LRAS
AD2
Real In. Rate
[Decr G; Incr T ] [Again, we get negative Xn]
r=6%
r=3%
$2 T tril.
PL2
T
AD1
E2
GDP
[like we have
“money trees”]
$1.8
$1.8
Y/Empl./PL;
AD
LFM
G
I.R.
$2.2
$2.2
T
F2 F1
E1
YF YI Real
G
Loanable Funds Market
D1
D2
S
DI
C
AD
Y/Emp/PL;
T
LFM
IR
Nominal Interest Rate
“It’s cheaper
to burn money
10
than wood.”
Dm
MS2 MS1
DI
10%
8
Investment
Demand
8%
6
6%
Sell
If there is
0
Money Market
INFLATION,
AS
AD2AD1
MS will be PL
decreased.
PL1
0
like
“money trees”
QID2 QID1
E1
E2
PL2
Y* YI
Fed
Sell
Bonds
MS
I.R.
QID
AD
Y/Empl./PL
MS1 MS
2
7%
5%
7%
DI(K)
Think
“Great Depression”
AD1
5%
Dm(K
1% )
0
Money Market
1%
0
SRAS
LRAS
PL
QID1 QID2
Investment Demand
YD
Y*
Keynesian view is that DM is flat [liquidity trap during a depression]
and DI is rather steep so monetary policy is not that strong.
Fiscal policy is “top banana.”
Also, the Keynesians don’t think the lower interest rate
is as important as “profit expectations.”
AD AD
PL
YD
GDP
Nominal Interest Rate
LRAS SRAS
MS1 MS2
Dm
E
1%
0
Money Market
500
Liquidity Trap – in a stagnant economy with interest rates near or at zero, an
increase in MS fails to stimulate AD, so recession or depression gets worse.
With low returns expected on financial investments, people hoard their money.
Banks are unwilling to lend in a slack economy. Fiscal policy is needed here.
DI(K)
MS1 MS2
i1
i1
AD1
i2
Money Market
LRAS
PL2
i2
PL1
Dm(M)
0
SRAS
QID1
QID2
Investment Demand
Yr Y*
Monetarist view is that DM is vertical [inelastic] and drop I.R. very much.
DI is rather flat [elastic] so monetary policy is very responsive to decreases in
the interest rate.
Monetarist view is that the economy is relatively stable so increase the
MS only as much as the increase in real GDP. They are against fiscal policy
because of “crowding out.”
Tax rate (percent)
100
L
0
Tax revenue (dollars)
Tax rate (percent)
100
M
L
0
Tax revenue (dollars)
100
Tax rate (percent)
N
M
L
0
Tax revenue (dollars)
100
Tax rate (%)
N
M
M
Maximum
Tax
Revenue
L
0
Tax revenue (dollars)
SRAS1
LRAS
AD2
PL
AD1
10%
The SRPC is almost
the mirror image of
the SRAS curve.
AD3
3%
1%
Recess. Inflat.
Gap
Gap
Alban William Housego Phillips
1914-1975
The new Phillips Curve will
have a SRPC & a LRPC.
Annual Rate of Inflation
YR
10%
YI
3%
Y*
5%
PC
SRPC
LRPC
“More inflation” or
“more unemloyment”
10%
3%
1%
Inflat.
Gap
3%
Recess.
Gap
5%
10%
Menu of Choices
Unemployment
5% is Y*(F) with 3% anticipated PL.
Annual rate of inflation
PC
7%
6%
5%
4%
AS
inflation declines...
3%
2%
Unemploy.
1%
increases
1
2
3
4
5
6
7
Unemployment rate (percent)
Also if there is a
decrease in AD,
there is a movement
down and to the
right on the SRPC.
Also if the SRAS
curve shifts right,
the SRPC shifts left.
Annual Rate of Inflation (Percent)
Remember, anytime there
is an increase in AD,
there is a movement up
and to the left on the
SRPC.
15%
Remember, any time
the SRAS curve
12%
shifts left the SRPC
shifts right.
LRPC
SRPC3
b3
SRPC2
9%
a3
b2
SRPC1
6%
c3
a1
c2
b1
3%
0
a2
3
4
5
6
Unemployment Rate (Percent)
There is a SRPC [output prices are changing] and a LRPC
[output & input prices chg after unanticipated inflation or disinflation]
- when unemployment = the natural rate and there is
no tendency for PL to be incr/decr. PL is stable & contracts reflect it.
LRPC
LRPC
My salary just
Inflation
isn’t keeping up.
Let’s say that inflation
has averaged 3% for three
years. 3% is anticipated.
15%
SRPC3
Wow, my raise exceeds inflation.
12%
But my raise
was only 6%.
SRPC2
9%
b3
a3
b2
SRPC1
6%
But my salary went up
by only 3%.
3%
But when it comes time to sign
a new contract, his boss says …
a2
It can’t get any better.
My raise exceeds inflation.
c3
b1
a1
Inflat.
Gap
Recess.
Gap
c2
C1
0
3%
5%
7%
Let’s say that inflation
has averaged 9% for
the past few years.
9% is anticipated.