Transcript Accommodation prices

Chapter 23
The Challenges of
Monetary Policy
©2000 South-Western College Publishing
What is stagflation?
A condition of concurrent
high unemployment and
inflation
2
Long Run
Sustainable Economic Growth
determined by the growth and
productivity of labor and capital
Short Run
Full Employment
Stable Prices
Exhibit 23 - 1
Achieving these goals in the
short run helps to achieve
maximum sustainable economic
growth in the long run
Satisfactory External Balance
compatible with full
employment and stable prices
3
Steady Noninflationary Growth
Price
Level
LRAS
LRAS'
1.10
•D
1.05
1.00
A
LRAS''
•I
B
C
AD''
AD
AD'
$4,000
$4,120
$4,244
Real GDP (billions)
Exhibit 23 - 2
4
(A) = Nominal Interest Rate
(B) = Expected Inflation Rate
(C) = Taxes
(D) = Real After Tax Return
(Eq. 23.1)
(Eq. 23.2)
(A) – (B) –
(C)
= (D)
.04 –
0 – (.2 5  .04) = .03
.06 – .02 – (2.5  .06) = .025
5
Deflation
A drop in the overall price
level as measured by a
price index
6
Employment Act of 1946
The first act that directed
policymakers to pursue
policies to achieve full
employment and
noninflationary growth
7
Humphrey-Hawkins Full
Employment & Balanced Growth
Act of 1978
An act that required
policymakers to pursue
policies to achieve full
employment and
noninflationary growth
8
Natural Rate of
Unemployment
The rate of
unemployment consistent
with stable prices,
believed to be about 5.5
percent
9
An Unexpected Increase in Aggregate
Demand with No Fed Response
Price
Level
LRAS
SRAS'
C
SRAS
1.10
B
1.05
1.00
A
AD'
AD
$1,500 $1,700
Real GDP (billions)
Exhibit 23 - 3
10
Possible Policymaker Response to an
Unexpected Increase in Aggregate Demand
Price
Level
LRAS
SRAS
B
A
AD
AD'
Real GDP
11
Exhibit 23 - 4
Demand-Induced Recession
Price
Level
LRAS
SRAS
SRAS'
A
1.00
.95
.90
B
C
AD'
AD
Real GDP (in billions)
12
Exhibit 23 - 5
Stop-Go Policy Cycle
Policy that switches
from expansionary to
contractionary, and so
on
13
Phillips Curve
A curve suggesting a
trade-off between
unanticipated inflation
and unemployment in the
short run
14
The Phillips Curve
Price
Level
LRAS
1.00
B
.95
.90
SRAS
A
C
AD'
AD''
AD
Real GDP
15
The Phillips Curve
Inflation
B
A
Unemployment
C
16
Supply Shock
Any event that shifts the shortrun aggregate supply curve
17
Cost-Push Inflation
Sustained increases in the
overall price level, triggered by
increases in input prices
18
Accommodation
When policymakers
increase aggregate
demand in response to an
adverse supply shock
19
An Adverse Supply Shock as a Cause of
Cost-Push Inflation
LRAS
Price
Level
C
SRAS'
SRAS
B
A
AD'
AD
Real GDP
20
Exhibit 23 -6