ECON 209 Lecture Notes - Lecture 30: Output Gap, Demand Shock, Shortage

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lemongoldfish251

19 Jul 2016

School

McGill University

Department

Economics

Course

ECON 209

Professor

Mayssun El- Attar Vilalta

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Document Summary

Inflation: rise in average level of all prices, usually expressed as annual % change in. Y = y*: nairu (not 0) - u* natural rate of unemployment, frictional & structural unemployment. Expect specific inflation rate pressure for money wages to rise by that rate. Increase wages & other factor prices unit costs increase as shifts up. Wage changes (by output gap & inflation expectations) determines effect on as curve. Constant level of inflation & monetary policy: expect actual inflation rate to continue. Constant inflation requires both expectations of inflation (shifts as) & continuing expansion of money supply by cb (shifts ad) Both workers & employers expect 2% inflation in coming years, employers expect to increase nominal wages by 2%/year. Wages rise by 2% as shifts up by 2% rate. For actual inflation rate = 2%: ad/as intersection shift up at rate of 2% Ad needs shift up by 2% - by growth of money supply.

Related Questions

Determine the effect on either the aggregate demand curve (is it a rightward or a leftward shift?), the aggregate short-term supply curve, and the long-term aggregate supply curve (does the upward sloping portions of the SAS curve shift left or right, or does the vertical portion of the LAS curve shift to the right or the left?). Also determine the effect on the price level, the real output level, and employment/unemployment. Explain and express this graphically using the AS/AD macro model.

If workers begin to expect more inflation in the future, then we would expect that the short-run aggregate supply curve will shift up. If workers expect more inflation in the future, they will want their wages to increase more rapidly today. This will increase production costs at each production level, causing firms to increase prices at each production level.

skykoala735

Illustrate how each of the following events would shift the AS schedule and potential Real GDP, thereby altering equilibrium prices and output levels in the economy. Use an aggregate supply-aggregate demand diagram in your explanation and assume that the economy is initially at full employment.

Note: Although some of the events listed below will also shift AD conditions in the economy, you do not need to show AD shifts in answering this question.

a) an increase in the general level of money wages

b) an increase in the price of imported oil and related energy products.

c) a decrease in the level of US interest rates

d) an increase in the productivity of labor

e) an increase in the expected inflation rate

f) an increase in the labor force growth rate

cyanalpaca633

Note: Although some of the events listed below will also shift AD conditions in the economy, you do not need to show AD shifts in answering this question.

a) an increase in the general level of money wages

b) an increase in the price of imported oil and related energy products.

c) a decrease in the level of US interest rates

d) an increase in the productivity of labor

e) an increase in the expected inflation rate

f) an increase in the labor force growth rate

pearherring887

ECON 209 Lecture Notes - Lecture 30: Output Gap, Demand Shock, Shortage

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