Macro Chapter 16

delfation

falling aggregate price level

rate of growth of money supply (change in money supply) x real money supply

real seignorage equation

decrease; increase (negative supply shock)

A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices

above; increases

According to the short-run Phillips curve, when actual real GDP is _____ potential output, the price level _____ and the unemployment rate falls

shifts SRPC up

An increase in the expected rate of inflation

classical; quickly

Historical evidence has led economists to conclude that during periods of high inflation, the _____ model of the price level is a good approximation of reality because nominal wages and prices adjust more _____ than during periods of low inflation

negatively; less than one-to-one

Okun's law finds that output gaps and unemployment rates are _____ related in a _____ ratio

higher inflation

Policies in the short run that produce a booming economy lead to?

shift down (positive supply shock)

Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve will

shift down

Suppose a fall in commodity prices causes a supply shock. The short-run Phillips curve will

no change (NAIRU); an increase

Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be _____ in the natural rate of unemployment and _____ in inflation.

energy; food

The U.S. government reports a core inflation rate that EXCLUDES _____ and _____ prices to remove the volatility of those two sectors from inflation estimates

the adjustment of prices to changes in the money supply is instantaneous; argue that this adjustment process takes some time

The main difference between the classical model of the price level and the modern understanding of the relationship between the money supply, the price level, and real GDP is that according to classical economists, _____, while today's economists _____.

aggregate price level (inflation)

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in

the actual unemployment rate is equal to the natural rate of unemployment

When actual aggregate output is equal to potential output

shifts up as the inflation rate increases (for every level of the unemployment rate)

negative supply shock on SRPC

depressed economies

policies in the short run that reduce inflation tend to depress the economy

to reduce inflationary expectations

policy makers need to adopt contractionary policies that keep the unemployment rate above the natural rate for an extended period of time

shifts down as the inflation rate falls (for every level of the unemployment rate)

positive supply shock on SRPC

long-run Phillips curve (LRPC)

shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience (vertical line)

relationship between LRPC and NAIRU

the LRPC shows that there are limits to expansionary policies because an unemployment rate below the NAIRU cannot be maintain in the long run--any unemployment rate above the NAIRU leads to decelerating inflation

Okun's Law

the negative relationship between the output gap and cyclical unemployment (cyclical unemployment moves less than the output gap) the idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5%

short-run Phillips curve (SRPC)

the negative short-run relationship between the unemployment rate and the inflation rate

dissinflation

the process of bringing the inflation rate down; can be very expensive (the cost is the loss of Real GDP in the process)

classical model of the price level

the real quantity of money is always at its long-run equilibrium level

debt deflation

the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation

inflation tax

the reduction in the value of the money held by the public, by printing money to cover its budget deficit and creating inflation

seignorage

the revenue generated by the government's right to print money

NAIRU (non-accelerating inflation rate of unemployment)

the unemployment rate at which inflation does not change over time (long run trade off between unemployment and inflation)

dollar amount x inflation

to find inflation tax

lose

under deflation borrowers...because the real burden of their debt rises; they are short of cash and will be forced to cut their spending

win

under deflation lenders.... because the real value of borrowers' payments increase

liquidity trap

when conventional monetary policy is ineffective, because nominal interest rates are up against the zero bound (irreducible) not going below 0)

the unemployment rate is above the natural rate

when the output gap is negative (a recessionary gap)

the unemployment rate is below the natural rate

when the output gap is positive (an inflationary gap)