Textbook Notes (384,642)
CA (170,154)
York (13,370)
ECON (1,012)
ECON 1010 (256)
Jean Adams (10)
Chapter 28

ECON 1010 - Class Notes - Chapter 28.docx

by OneClass159000 , Winter 2014
8 Pages
91 Views

Department
Economics
Course Code
ECON 1010
Professor
Jean Adams
Chapter
28

This preview shows pages 1-3. Sign up to view the full 8 pages of the document.
CHAPTER 28: Canadian Inflation, Unemployment, and Business Cycle
ECON 1010
Week 7
Inflation cycles
oIn the long run, inflation is a monetary phenomenon
oInflation occurs if money grows faster than potential GDP
oIn the short run, many factors can start an inflation and real GDP and the price
level interact
There are two sources of inflation:
oDemand-pull inflation
Inflation that starts because aggregate demand increases is called demand-
pull inflation
Can be triggered by anything that changes aggregate (interest rate,
increase in quantity of money, increase in G etc.)
Initial Effect of Increase in Aggregate Demand:
Price level rises
Real GDP increases above potential GDP (if previous equilibrium
was at potential GDP)
Unemployment falls below natural rate
An above full-employment economy creates an inflationary gap
A rise in the money wage rate occurs
oShortage of labour occurs, money wage create begins to
rise
oAs this happens, price level rises further, and real GDP
begins to decrease
oShort-run aggregate supply decreases; price level rises
further and real GDP begins to decreases
Demand-pull inflation process:
Aggregate demand must persistently increase (since otherwise it
would be evened out by the decrease in supply and would not
count as inflation)
For AD to persistently increase, quantity of money must
persistently increase
The ongoing rising price level is what creates inflation
oCost-push inflation
Kicked off by an increase in costs caused by:
Increase in money wage rate
oIf money wage rate rises, firms decrease supply of goods
and services because of higher production costs
Increase in money prices of raw materials (mostly oil)
oSame as above
At a given price-level, the higher the cost of production, the smaller the
number of firms willing to produce
Initial Effect of a Decrease in Aggregate Supply:
Oil producers come together to raise oil prices
SAS curve shifts to the left
Price level rises
Real GDP decreases
Economy, previously at full-employment equilibrium, is now at
below-employment equilibrium
Aggregate demand response: Bank of Canada, worried about
decreased GDP, increases quantity of money, thus increasing
aggregate demand and restoring full employment but further
raising price level
Prices rise for oil producers, who raise their prices once again
If the effect described above occurs repeatedly (due to an increase in the
amount of money by the Bank of Canada), inflation occurs
The combination of a rising price level and decreasing real GDP is called
stagflation
Bank of Canada dilemma: Raise money quantity  Inflation decided by oil
producers, Not raise money quantity  Employment at below full
Expected Inflation:
oFluctuation in real GDP doesn’t occur if inflation is expected, but instead real
GDP stays equal to potential GDP and inflation proceeds as it would in the long-
run
oWhen AD is expected to increase:
Potential, real GDP do not change, therefore LAS does not change
Money wage rate rises in anticipation; SAS curve shifts leftward
If money wage rate growth = inflation, then SAS moves to a point where
short term equilibrium will be at the same amount of real GDP
Price level rises by an expected amount
oMoney theory predicts an expected inflation at full-employment
Forecasting Inflation:
oTo anticipate inflation, people must forecast it.
oEconomists work with all available information to create a rational expectation;
best forecast possible
Inflation and the Business Cycle:
oWhen the inflation forecast is correct, the economy operates at full employment
oIf AD grows faster than expected, real GDP rises above potential GDP, with the
economy behaving in a demand-pull inflation (expansion)
oIf AD grows slower than expected, real GDP falls below potential GDP and the
inflation rate slows
Inflation and Unemployment: The Phillips Curve
oThe Phillips curve focuses on the short-run tradeoff and relationship between
inflation and unemployment
oHelps to study changes in both expected and actual inflation rates
oShort-Run Phillips Curve:
Sows the relationship between inflation and unemployment with expected
inflation rate and natural unemployment rate held constant (y,x)

Loved by over 2.2 million students

Over 90% improved by at least one letter grade.

Leah — University of Toronto

OneClass has been such a huge help in my studies at UofT especially since I am a transfer student. OneClass is the study buddy I never had before and definitely gives me the extra push to get from a B to an A!

Leah — University of Toronto
Saarim — University of Michigan

Balancing social life With academics can be difficult, that is why I'm so glad that OneClass is out there where I can find the top notes for all of my classes. Now I can be the all-star student I want to be.

Saarim — University of Michigan
Jenna — University of Wisconsin

As a college student living on a college budget, I love how easy it is to earn gift cards just by submitting my notes.

Jenna — University of Wisconsin
Anne — University of California

OneClass has allowed me to catch up with my most difficult course! #lifesaver

Anne — University of California
Description
CHAPTER 28: Canadian Inflation, Unemployment, and Business Cycle ECON 1010 Week 7 • Inflation cycles o In the long run, inflation is a monetary phenomenon o Inflation occurs if money grows faster than potential GDP o In the short run, many factors can start an inflation and real GDP and the price level interact • There are two sources of inflation: o Demand-pull inflation  Inflation that starts because aggregate demand increases is called demand- pull inflation  Can be triggered by anything that changes aggregate (interest rate, increase in quantity of money, increase in G etc.)  Initial Effect of Increase inAggregate Demand: • Price level rises • Real GDP increases above potential GDP (if previous equilibrium was at potential GDP) • Unemployment falls below natural rate • An above full-employment economy creates an inflationary gap • Arise in the money wage rate occurs o Shortage of labour occurs, money wage create begins to rise o As this happens, price level rises further, and real GDP begins to decrease o Short-run aggregate supply decreases; price level rises further and real GDP begins to decreases  Demand-pull inflation process: • Aggregate demand must persistently increase (since otherwise it would be evened out by the decrease in supply and would not count as inflation) • ForAD to persistently increase, quantity of money must persistently increase • The ongoing rising price level is what creates inflation o Cost-push inflation  Kicked off by an increase in costs caused by: • Increase in money wage rate o If money wage rate rises, firms decrease supply of goods and services because of higher production costs • Increase in money prices of raw materials (mostly oil) o Same as above  At a given price-level, the higher the cost of production, the smaller the number of firms willing to produce  Initial Effect of a Decrease inAggregate Supply: • Oil producers come together to raise oil prices • SAS curve shifts to the left • Price level rises • Real GDP decreases • Economy, previously at full-employment equilibrium, is now at below-employment equilibrium • Aggregate demand response: Bank of Canada, worried about decreased GDP, increases quantity of money, thus increasing aggregate demand and restoring full employment but further raising price level • Prices rise for oil producers, who raise their prices once again  If the effect described above occurs repeatedly (due to an increase in the amount of money by the Bank of Canada), inflation occurs  The combination of a rising price level and decreasing real GDP is called stagflation  Bank of Canada dilemma: Raise money quantity  Inflation decided by oil producers, Not raise money quantity  Employment at below full • Expected Inflation: o Fluctuation in real GDP doesn’t occur if inflation is expected, but instead real GDP stays equal to potential GDP and inflation proceeds as it would in the long- run o WhenAD is expected to increase:  Potential, real GDP do not change, therefore LAS does not change  Money wage rate rises in anticipation; SAS curve shifts leftward  If money wage rate growth = inflation, then SAS moves to a point where short term equilibrium will be at the same amount of real GDP  Price level rises by an expected amount o Money theory predicts an expected inflation at full-employment • Forecasting Inflation: o To anticipate inflation, people must forecast it. o Economists work with all available information to create a rational expectation; best forecast possible • Inflation and the Business Cycle: o When the inflation forecast is correct, the economy operates at full employment o If AD grows faster than expected, real GDP rises above potential GDP, with the economy behaving in a demand-pull inflation (expansion) o If AD grows slower than expected, real GDP falls below potential GDP and the inflation rate slows • Inflation and Unemployment: The Phillips Curve o The Phillips curve focuses on the short-run tradeoff and relationship between inflation and unemployment o Helps to study changes in both expected and actual inflation rates o Short-Run Phillips Curve:  Sows the relationship between inflation and unemployment with expected inflation rate and natural unemployment rate held constant (y,x)  Equivalent to the SAS curve in that it brings a higher price level and an increase in real GDP while Phillips curve brings a higher inflation rate and a lower unemployment rate, and vice versa o Long-run Phillips Curve:  Shows the relationship between inflation and the unemployment when the actual inflation rate equals the expected inflation rate  Long-run phillips curve is vertical at the natural unemployment rate  Any expected inflation rate is possible at the natural unemployment rate  SRPC intersects LRPC at the expected inflation rate  If the inflation rate falls, there is a movement down along the LRPC, while the SRPC shifts down o Change in the Natural Unemployment Rate:  SRPC moves to the right/above  LRPC moves to the right  Expected inflation rate generally has a greater effect • The Business Cycle o Mainstream business cycle theory  Potential GDP grow at a steady rate while aggregate demand grows at a fluctuating rate
More Less
Unlock Document


Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit