Chapter 9

Question 1

what are cost push shocks? give examples

Answer 1

shocks which raise prices for given wages
eg. unexpected increase in oil, raw materials and tax
low productivity growth

Question 2

what does the effects of monetary policy and the position of the phillips curve depend on?

Answer 2

how wage setters form expectations about inflation

Question 3

what happens when expected inflation = 0 or its constant?

Answer 3

stable trade off between inflation and unemployment

Question 4

what happens if inflation is high and variable? if expected inflation = previous inflation what is the relation here?

Answer 4

wage setters may expect inflation to continye at past rates observed
increase inflation increases expected inflation
one high level of inflation has come to be expected high inflation will continue even if Y at Yn

If expected inflation t = inflation t-1
change in inflation = beta Y^ + Z

(acceleration of inflation and output gap)

Question 5

what can a strict and credible inflation target help to do?

Answer 5

helps stabilise curve - keeps expected inflation stable and prevents inflation from becoming self fufilling

Question 6

what does the data say about the Phillips curve?

Answer 6

strong relationship between output gap and change in inflation
no stable between unemployment and inflation

Question 7

with simplified production Y = EN what is price equal to? what about inflation?

Answer 7

P = (1 + markup) W/E
inflation = change in W/W - change in E/E

where W/E is wage cost per unit
change in W/W is rate of wage increase
change in E/E is rate of productivity increase

Question 8

using the equation for desired wage change how do we get a phillips curve relating to expected wage increases and unemployment?

Answer 8

change in W^d/ Wt-1= change in Wt/ Wt-1 - b(ut - u^n)

change in Wt/ Wt-1 = change in expected wage/ Wt-1 - b^(ut-u^n)

where b ^ = lambda b/ (1 - lambda)

Question 9

what does (1 - lambda) stand for in the model?

Answer 9

(1- lambda) is rigid wages
lambda are flexible wages

Question 10

whats the equation for the phillips curve which shows the factors inflation depends on? what does this mean?

Answer 10

inflation = expected inflation + beta Y^ + Z

1. expected inflation rate
2. output gap
3. cost push shocks

if there no Z and Y at Yn then inflation = expected inflation
the higher expected inflation the more wages will increase leading to higher inflation

Question 11

what is the output gap?

Answer 11

the deviation of production from its natural level. when Y and employment above natural level, there is upward pressure on wages and prices