ECON 110 Chapter Notes - Chapter 30: Aggregate Demand, Monetary Inflation, Output Gap

• School: Queen's University
• Department: Economics
• Course: ECON 110
• Professor: Ian James Cromb

Document Summary

Inflation: a rise in the average level of all prices. Usually expressed as the annual percentage change in the consumer price. Output gap and expectations of future inflation are causes for wages to change. When gdp = y*, the unemployment rate is equal to nairu (non-accelerating inflation rate of unemployment) designated by u* Inflationary gap = (y > y*) = (u < u*) Nairu is not zero because of frictional and structural unemployment (movement of people between jobs) Recessionary gap = (y < y*) = (u > u*) The expectation of inflation causes workers to negotiate increase in money wages from expected base rate to hold real wages constant (even if inflation wouldn"t have actually occurred) Backward-looking expectations change slowly, some time must pass before a change in the actual rate of inflation provides enough past experience to cause expectations to adjust.