ECON 295 Lecture Notes - Lecture 13: Output Gap, Demand Shock, Shortage
31 Mar 2017
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Macro lecture 13 chapter inflation and disinflation. The bank of canada strives to keep inflation low and stable. The result is an environment where firms, workers and households can more easily make plans for the future. Y excess supply of labour: expected inflation. Some workers/firms raise wages in advance of inflation. Change in money wages = output-gap effect + expectational effect. Overall effect on nominal wages determines how the as curve shifts. Actual inflation = output-gap inflation + expected inflation + supply shock inflation. The last term captures any shifts in the as curve caused by things other than wage changes. If inflation has been constant for several year and there is no indication of an impeding change in monetary policy: Y must equal y* -> no output gap. Constant inflation with y=y* occurs when the rate of monetary growth, the rate of wage increase, and expected inflation are all consistent with the actual inflation rate.
