ECN 600 Lecture Notes - Lecture 3: Labour Market Flexibility, Real Interest Rate, Aggregate Supply

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29 Feb 2016
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Okun"s law shows the relationship between unemployment rate and the real gdp: u u* = -0. 6 x (y y*/ y*, (y y*/ y*) = - 1. 7 x (u-u*) This relationship is known as the philip curve. The philips curve: as can relate the inflation rate to the level of real gdp: (y y*/ y*) = ( - e, the right hand side of this equation can be substituted into okun"s law: = e 1. 7/ x (u u*) Letting = 1. 7/ we get: = e x (u u*) + s: the slope of the philips cure depends on how sticky the prices and wages are. A higher natural rate moves the pc to the right. Higher expected inflation moves the pc up. How much the central bank raises the real interest rate in response to inflation. How much real gdp changes in response to a change in the real interest rate.

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