ECO200Y1 Chapter Notes - Chapter Chapter 9 : Potential Output, Phillips Curve, Fiscal Policy
An#introduction#to#the#Short#run
long-run model ⇒potential output, long-run inflation
short- run model ⇒current output, current inflation
The short run is defined to be the length of time over which these
!
deviations occur.
actual output = long-run trend + short-run fluctuations
!
𝑌𝑌 =𝑦𝑡 −𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑦𝑡
𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑦𝑡
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
!
Yt=$actual$output$
!
Constantyt$=$potential$output$
!
The$short$run$models$are$based$on$three$main$thins:
!
The$economy$is$constantly$hit$by$shocks.$This$means$changes$in$1)
oil$prices,$disruptions$in$financial$markets,$development$of$new$
technologies,$changes$in$military$spending$and$natural$disasters$
can$push$actual$output$away$from$potential$output$and/or$$
move$inflation$rate$away$from$long$run$rate.$
Monetary$and$Fiscal$policy$affect$output.$$In principle,
2)
this means policymakers might be able to neutralize
shocks to the economy.
Dynamic Trade off between output and inflation: A booming
3)
economy today—in which the economy is producing more
than its potential output—leads to an increase in the inflation
rate. Conversely, if the inflation rate is high an policymakers
want to lower it, a recession is typically required.
This trade-off is known as the Phillips curve.
Okun's#law:#Output#and#Unemployment#
U=$unemployment$
!
UG=$natural$rate$of$unemployment$
!
Okun’s law, which allows us to go back and forth between
short-run output and the unemployment rate, says that a
one percentage point decline in output below potential
corresponds to a half percentage point increase in the
unemployment
rate.
Chapter(9(notes(
Monday,$January$8,$2018
1:13$PM
An#introduction#to#the#Short#run
long-run model ⇒potential output, long-run inflation
short- run model ⇒current output, current inflation
The short run is defined to be the length of time over which these
!
deviations occur.
actual output = long-run trend + short-run fluctuations
!
𝑌𝑌 =𝑦𝑡 −𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑦𝑡
𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡𝑦𝑡
⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯⎯
!
Yt=$actual$output$
!
Constantyt$=$potential$output$
!
The$short$run$models$are$based$on$three$main$thins:
!
The$economy$is$constantly$hit$by$shocks.$This$means$changes$in$1)
oil$prices,$disruptions$in$financial$markets,$development$of$new$
technologies,$changes$in$military$spending$and$natural$disasters$
can$push$actual$output$away$from$potential$output$and/or$$
move$inflation$rate$away$from$long$run$rate.$
Monetary$and$Fiscal$policy$affect$output.$$In principle,
2)
this means policymakers might be able to neutralize
shocks to the economy.
Dynamic Trade off between output and inflation: A booming
3)
economy today—in which the economy is producing more
than its potential output—leads to an increase in the inflation
rate. Conversely, if the inflation rate is high an policymakers
want to lower it, a recession is typically required.
This trade-off is known as the Phillips curve.
Okun's#law:#Output#and#Unemployment#
U=$unemployment$
!
UG=$natural$rate$of$unemployment$
!
Okun’s law, which allows us to go back and forth between
short-run output and the unemployment rate, says that a
one percentage point decline in output below potential
corresponds to a half percentage point increase in the
unemployment
rate.
Chapter(9(notes(
Monday,$January$8,$2018 1:13$PM
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ECO200Y1 Full Course Notes
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