chapter 14

Question 1

NAIRU acronym

Answer 1

Non accelerating inflation rate of employment

Question 2

Overall wage effect

Answer 2

change in wages= output gap effect + expectational effect

Question 3

What is the equation for actual inflation

Answer 3

Actual inflation= output gap inflation + expected inflation + supply shock inflation

Question 4

What is causing inflation when there are no output gaps

Answer 4

When the rate of monetary expansion, the rate of wage increase and the expected rate of inflation are consistent with the actual inflation rate

Question 5

cause of inflation are

Answer 5

• anything that shifts AD to the right cause price to rise (demand inflation)
• anything that shifts AS upwards raises price lvl (supply inflation)
• increases in price level by those shocks will eventually come to a halt unless they are continually validated by monetary policy
  –» sustained inflation must be a monetary phenomenon

Question 6

cost and crucial factor of reducing inflation

Answer 6

cost: lost output, unemployment
- factor: expectations need to be revised, they can cause inflation to persist even if its cause is removed

Question 7

What is the sacrifice ratio?

Answer 7

It is the cummulative loss in real GDP expressed as a % of potential output, divided by the %point reduction achieved in the rate of inflation