Chapter 17 Flashcards
what does the SRPC show
short run trade off between inflation and unemployment. Inversely related. X = unemployment Y = inflation
how do you derive a SRPC form the AD/SRAS model
As aggregate demand increases unemployment decreases but inflation increases.
How do expectations change in the long run
Expectations adjust to reality. People/biz adjust expectations based on actual outcomes of economy. after a short run fluctuation and everything cools down peoples expectations will go back to normal/natural rate
Why is the LRPC vertical
in long run unemployment and inflation always shift back to their natural rates, the only time it shifts in the long run is if Un is changed, (minimum wage). Inflation and unemployment will always shift back to natural rates
How do supply shocks shift the SRPC
when prices rise SRPC shift left/up, Y falls, U rises. When prices decrease SRPC shift right/down, Y rises, U falls. prices decreased meaning more can be produced for cheaper and more can be produced and more will want to be consumed
what is an improved tradeoff
where both inflation and unemployment are relatively lower compared to previous situation
why is policy so difficult during stagflation
policy fixes on problem and worsens the other
what did fed have to do during second round of stagflation
changed their fed policy to lower inflation (disinflation), use contractionary policy to reduce inflation, this increased U, in the long run each will go back to natural rate along with expectations
what is stagflation
high unemployment high inflation
sacrifice ratio
percentage that output must fall to cause a 1% reduction of inflation.
- if 5, to reduce inflation by 6% output needs to fall 30%.
- fed is very concerned with stopping elation early on for this reason.
- expected inflation cost is low but unexpected is very high
