EC140 Chapter Notes - Chapter 30: Output Gap, Disinflation, Supply Shock
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EC140 Full Course Notes
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Understand why wages change in response to output gaps and inflation expectations. Add a constant rate of inflation to our ad/as model. Explain how ad and as shocks affect inflation and real gdp. Explain what happens when the boc validates demand and supply shocks. Explain how the cost of disinflation can be measured by the sacrifice ratio. Inflation is a rise in the avg. level of prices. Commonly measured as the annual percentage in cpi. First step add sustained/constant inflation to the model. Output gap: inflationary gap (y > y*) puts upward pressure on wages, recessionary gap (y < y*) puts downward pressure on wages, when y = y*, unemployment equals nairu (sometimes called the natural rate) Expectations of inflation: expected inflation is a starting point for wage negotiations (maintains real wage) Change in wages determined by these two effects.
