ECON 105 Lecture Notes - Demand Shock, Macroeconomic Model, Aggregate Demand

• School: Simon Fraser University
• Department: Economics
• Course: ECON 105
• Professor: Tony Xiang

Document Summary

Y > y* excess demand for labour. Y < y* excess supply of labour. Some workers/firms raise wages in advance of inflation. Change in money wages = output-gap effect + expectational effect. Overall effect on nominal wages determines how the as curve shifts. Actual inflation = output-gap + expected + supply. The last term captures any shifts in the as curve caused by things other than wage changes. (eg. , change in raw material prices) If inflation has been constant for several years and there is no indication of an impending change in monetary policy: If expected inflation equals actual inflation: y must equal y* Constant inflation with y=y* occurs when the rate of money growth, the rate of wage increase, and expected inflation are all consistent with the actual inflation rate. Wage costs are rising because of expectations of inflation. Expectations are being validated by the central bank (money growth)