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ECON 110 (192)
Chapter 25

Chapter 25 Notes

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Queen's University
ECON 110
Ian James Cromb

Chapter 25 Notes 251Two Examples Inflation and Interest Rates in CanadaInflation erodes the value of money lenders must be compensated for the inflationinduced fall in the real value of their moneyHigher inflation pushes up interest rates lower inflation pushes them downThiessen argues that to reduce inflation rate growth rate of money supply should be reduced this makes credit more scarce causing interest to rise and investments to fall shifting AD curve leftThis induced recession stops inflationUnemployment and recession puts downward pressure on wages tey grow slowly pressure on price decline and inflation fallsMoney is neutral in the longrun because it does not effect real variables like GDP employment and investment but does have an effect on nominal variables like price level and inflation change in money supply do not change potential YMoney is not neutral in the shortrun Saving and Growth in JapanToo much saving in the short run decreases consumption and causes an economic slump in the short runIn the long run after wages and factor prices adjust to the output gap savings creates a greater pool of capital This lowers interest rates making investment more profitable which leads to higher levels of projected incomeNational income in the shortrun is demand determinedNational income is supply determine in the longrun A Need to Think DifferentlyShortrun changes in GDP are deviations o output from potential while longrun changes in GDP are changes in the level of potential output 252Accounting for Changes in GDP Potential GDP
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