EC140 Lecture Notes - Lecture 19: Stagflation, Monetary Policy, Potential Output

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

Document Summary

Add a constant rate of inflation to our ad/as model: understand why wages change in response to output gaps and inflation expectations. 2: explain how ad and as shocks affect inflation and real gdp. 4: understand the three phases of disinflation, explain how the cost of disinflation can be measured by the sacrifice ratio. Explain what happens when the boc validates demand and supply shocks. Inflation is a rise in the average level of prices. Commonly measured as the annual percentage change in cpi. First step - add sustained/constant inflation to the model. Expectations of inflation: expected inflation is a starting point for wage negotiations (maintains real wage) Change in wages determined by these two effects. 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. Change in wages caused by output gap and expected inflation.