Macro Chapter 19
The Phillips curve shifts in response to unexpected changes in...
- input prices -productivity -exchange rates
The output gap measures the imbalance between ______ and _________ ________ .
- output - productive capacity
What causes an increase in inflation?
- increase in expectations - increase in output gap - increase in production costs
Investment banks, businesses, and government economists forecast inflation using estimates of the Phillips curve. It is a two-step process:
1. Assess inflation expectations 2. Forecast unexpected inflation
If businesses expect prices to rise by 2%, they will increase their prices by ___ , ensuring prices actually rise by at least 2%.
2%
Total inflation
Inflation = expected inflation + demand - pull inflation + cost - push inflation
Demand-pull inflation
Is driven by the output gap. It leads inflation to diverge from inflation expectations.
The output gap is currently zero, and inflation is 2%, where it has been for several years. The government announces an unexpected stimulus package that is expected to increase next year's output gap to 3% above potential output. What is your forecast for inflation after the stimulus?
It will rise above 2%
The unemployment rate is an alternative indicator of...
insufficient or excess demand
Three methods for measuring inflation expectations
Surveys of consumers, surveys and forecasts of economists, and financial markets
Input Prices: Price of Labor
Workers' spending power falls, nominal wages rise, cost of production rises, prices rise
Unexpected inflation
the difference between inflation and inflation expectations
Inflation expectations can be...
adaptive, anchored, rational, sticky
decreasing unemployment rate leads to...
an increase in unexpected inflation
Supply shock
any change in production costs that leads suppliers to change the prices they charge at any given level of output (shifts the Phillips Curve)
In the long run, the key to persistent low inflation is to...
convince people that inflation is going to be low
Unexpected boosts to production costs push sellers to raise their prices, resulting in...
cost-push inflation
The US president unexpectantly announces a tariff on aluminum and steel. You believe that...
cost-push inflation will rise
At the equilibrium unemployment rate, unexpected inflation is zero, so inflation is...
equal to inflation expectations
When the economy is operating at full capacity, inflation _____ inflation expectations.
equals
When the quantity demanded at the prevailing price exceeds the quantity supplied, there is _____ ______ .
excess demand
When output exceeds potential output...
excess demand leads managers to raise prices more, causing inflation to rise above expected inflation
In October 2019, inflation expectations in the US fell to 2.5%, down from 2.8% in September 2019. If nothing else changes in the economy, you would expect actual inflation to...
fall
Insufficient demand leads inflation to ____ ______ inflation expectations
fall below
Phillips Curve
illustrates the link between the output gap and unexpected inflation
Input Prices: Oil and Commodity Prices
increased oil prices lead to higher electric heating bills, gas prices, transportation prices, etc.
A healthy economy _______ the demand for goods and services.
increases
A short-run solution to excess demand is ________ _____ .
increasing prices
The output gap drives inflation to rise above or fall below ________ ___________ .
inflation expectations
Demand-pull inflation
inflation resulting from excess demand
Cost-push inflation
inflation that results from an unexpected rise in production costs
When the output gap is negative...
inflation typically falls below inflation expectations
When the output gap is positive...
inflation typically rises above inflation expectations
What do businesses consider when setting the prices for their goods and services?
input costs (marginal costs), competitor prices, and information about future prices
When output is less than potential output...
insufficient demand leads to price restraint, causing inflation to fall below expected inflation
When output gap rises...
leads to excess demand, leads to rising prices, leads to movement along the Phillips curve (upward and to the right)
Decrease in input costs Increase in productivity growth Increase in US dollar
leads to falling production costs, leads to falling prices at each output gap (or slower rates of increase), leading the Phillips curve to shift down
When output gap decreases...
leads to insufficient demand, leads to falling prices (or slower rates of increase), leads to movement along the Phillips curve (downward and to the left)
Rise in Input costs Decrease in productivity growth Decrease in US dollar
leads to rising production costs, leads to rising prices at each output gap, leading the Phillips curve to shift up
Cost-push inflation leads to more inflation at any given...
level of the output gap and for any given level of inflation expectations
labor market Phillips curve
links unexpected inflation to the unemployment rate (rather than the output gap)
The labor market Phillips curve shows that higher unemployment leads to...
lower unexpected inflation
Policy makers decide to increase the federal minimum wage to $15 per hour immediately. If the output gap does not change, you expect inflation to...
rise
Excess demand leads inflation to _____ _____ inflation expectations.
rise above
Rising production costs lead to...
rising prices at any given output gap, shifting the Phillips curve up
Appreciation US dollar...
shifts Phillips curve down
Depreciation US dollar...
shifts Phillips curve up
When output is equal to potential output...
the absence of demand-pull inflation means that inflation will be equal to expected inflation
Inflation expectations
the rate at which average prices are anticipated to rise next year.
High-inflation countries are stuck in a ______ ______ .
vicious cycle
Low-inflation countries enjoy a ________ _____ .
virtuous cycle