EC140 Lecture Notes - Lecture 16: Stagflation, Monetary Policy, Potential Output

• School: WLU
• Department: Economics
• Course: EC140
• Professor: Ken Jackson

Document Summary

Inflation is a rise in the average level of prices: commonly measured as the annual percentage change in cpi, anticipated vs. unanticipated inflation, first step add sustained/constant inflation to the model. Inflation expectations: backward-looking expectations, what has inflation been in the recent past, does not respond to expected policy changes, forward-looking expectations, consider current economic conditions, account for changes in government policy, extreme version rational expectations. Wages and aggregate supply: change in wages caused by output gap and expected inflation. If wages rise, as curve shifts up (to the left: net effect is inflationary causes price level to rise. If wages fall, as curve shifts down (to the right: net effect is deflationary causes price level to fall. Decomposing inflation: output-gap inflation, caused by inflationary gap, expected inflation, affects wage contracts, supply-shock inflation. If non-wage prices rise, this shifts the as curve and induces inflation. Demand shocks: what happens if aggregate demand increases, the initial change is an inflationary gap.