EC140 Chapter Notes - Chapter 30: Overnight Rate, Unemployment Benefits, Rational Expectations
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EC140 Full Course Notes
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Y > y* -> excess demand for labour. Some workers/irms raise wages in advance of inlaion. Change in money wages = output-gap efect + expectaional efect. Overall efect on nominal wages determines how the as curve shits -> impact on price level. Actual inlaion = output gap inlaion + expected inlaion + supply shock inlaion. The last term captures any shits in the as curve caused by things other than wage changes. If inlaion has been constant for several years and there is no indicaion of an impending change in monetary policy -> expected inlaion will equal actual inlaion. > y must equal y* and no output gap. Constant inlaion with y = y* occurs when the rate of monetary growth, the rate of wage increase, and expected inlaion are all consistent with the actual inlaion rate. Demand inlaion results from a rightward shit in the ad curve. A demand shock that is not validated produces only temporary inlaion.
