EC140 Lecture Notes - Lecture 18: Stagflation, Money Supply, Aggregate Demand
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Is a ride in the average level of prices. Commonly measured as the annual percentage change in cpi. First step- add sustained/ constant inflation to the model. Inflationary gap (y > y*) puts upward pressure on wages: recessionary gap (y < y*) puts downward pressure on wages, when y = y* unemployment equals nairu. Expectations of inflation: expected inflation is a starting point for wage negotiations (maintains real wage) Backward- looking expectations: what has inflation been in recent past years, does not respond to expected policy change. Forward looking expectations: consider current economic conditions, account for changes in government policy, extreme vision- rational expectations. Changes in wages caused by output gap and expected inflation. If wages rise, the 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. Out-put gap inflation: caused by inflationary gap.
