AS.180.101 Lecture Notes - Lecture 4: Janet Yellen, Price Signal, Deflation
Document Summary
Lecture #7: (1) the final ae model and (2) measuring inflation. The ae model: the complete picture: we begin with a super simple model, no gov"t. Not the rest of the components: equilibrium: output/income = planned expenditure, the gap (on both size) = unplanned inventory changes. Increase in unplanned inventories firms cut back on production! Decrease in unplanned inventories firms increase production! Now we turn to inflation rest of lecture on inflation looking at measures. Inflation: the overall price level and its rate of change: the overall price level is an index of a comprehensive basket of goods and services, if we have prices in general rising, it messes up the invisible hand. Smith said price signals tell you to make more or less and that it is the price level that tells firms how much to produce or not. Smith and the price signal is that it is a legitimate signal.
