inflation a significant and persistent increase in the price level
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INFLATION
A significant and persistent increase in the price level
bull httpwwwinvestopediacomuniversityinflationinflation1asp
Inflation and the Price Level
bull Inflation is a process in which the price level is rising and
bull money is losing valuebull Inflation is a rise in the price level not in
the price of abull particular commoditybull And inflation is an ongoing process not a
one-time jump inbull the price level
Deflation
bull A drop in the overall price level
Inflation and the Price Level
Inflation and the Price Level
bull The inflation rate is the percentage change in the pricebull levelbull That is where P1 is the current price level and P0 is lastbull yearrsquos price level the inflation rate isbull [(P1 ndash P0)P0] times 100bull Inflation can result from either an increase in aggregatebull demand or a decrease in aggregate supply and bebull 1048707 Demand-pull inflationbull 1048707 Cost-push inflation
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
bull httpwwwinvestopediacomuniversityinflationinflation1asp
Inflation and the Price Level
bull Inflation is a process in which the price level is rising and
bull money is losing valuebull Inflation is a rise in the price level not in
the price of abull particular commoditybull And inflation is an ongoing process not a
one-time jump inbull the price level
Deflation
bull A drop in the overall price level
Inflation and the Price Level
Inflation and the Price Level
bull The inflation rate is the percentage change in the pricebull levelbull That is where P1 is the current price level and P0 is lastbull yearrsquos price level the inflation rate isbull [(P1 ndash P0)P0] times 100bull Inflation can result from either an increase in aggregatebull demand or a decrease in aggregate supply and bebull 1048707 Demand-pull inflationbull 1048707 Cost-push inflation
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Inflation and the Price Level
bull Inflation is a process in which the price level is rising and
bull money is losing valuebull Inflation is a rise in the price level not in
the price of abull particular commoditybull And inflation is an ongoing process not a
one-time jump inbull the price level
Deflation
bull A drop in the overall price level
Inflation and the Price Level
Inflation and the Price Level
bull The inflation rate is the percentage change in the pricebull levelbull That is where P1 is the current price level and P0 is lastbull yearrsquos price level the inflation rate isbull [(P1 ndash P0)P0] times 100bull Inflation can result from either an increase in aggregatebull demand or a decrease in aggregate supply and bebull 1048707 Demand-pull inflationbull 1048707 Cost-push inflation
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Deflation
bull A drop in the overall price level
Inflation and the Price Level
Inflation and the Price Level
bull The inflation rate is the percentage change in the pricebull levelbull That is where P1 is the current price level and P0 is lastbull yearrsquos price level the inflation rate isbull [(P1 ndash P0)P0] times 100bull Inflation can result from either an increase in aggregatebull demand or a decrease in aggregate supply and bebull 1048707 Demand-pull inflationbull 1048707 Cost-push inflation
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Inflation and the Price Level
Inflation and the Price Level
bull The inflation rate is the percentage change in the pricebull levelbull That is where P1 is the current price level and P0 is lastbull yearrsquos price level the inflation rate isbull [(P1 ndash P0)P0] times 100bull Inflation can result from either an increase in aggregatebull demand or a decrease in aggregate supply and bebull 1048707 Demand-pull inflationbull 1048707 Cost-push inflation
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Inflation and the Price Level
bull The inflation rate is the percentage change in the pricebull levelbull That is where P1 is the current price level and P0 is lastbull yearrsquos price level the inflation rate isbull [(P1 ndash P0)P0] times 100bull Inflation can result from either an increase in aggregatebull demand or a decrease in aggregate supply and bebull 1048707 Demand-pull inflationbull 1048707 Cost-push inflation
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Causes of Inflation
bull Inflation is an increase in the overall price level
bull Sustained inflation occurs when the overall price level continues to rise over some fairly long period of time
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Stagflation
bull A condition of concurrent high unemployment (stagnation) and inflation
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Cost-Push Inflation
bull An inflation triggered by increases in input prices
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Causes of Inflationbull Demand-pull inflation is inflation initiated
by an increase in aggregate demandbull Cost-push or supply-side inflation is
inflation caused by an increase in costs
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
bull An inflation caused by high levels of demand
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Demand
bull The total quantity of commodities that are demanded at various prices
bull Total spending in economy at alternative price levels
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Supply
bull Total output of the economy at alternative price levels
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
bull Changes in aggregate demand and supply cause the
bull equilibrium price level and real GDP to change
bull resulting in business cycles
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Demand Aggregate Supplyand Business Cycles
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand Pull Inflation-Cost PushInflation
bull Demand-pull inflation inflation causedby increasing demand for output
bull Cost-push inflation inflation caused byrising cost of production
bull Examplesbull Home prices
bull Oil prices
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Demandand Business Cycles
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Supplyand Business Cycles
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Factors that affect AD
bull AD = C+I+G+NXbull CONSUMPTIONbull Income wealth expendituredemographicstaxes
bull INVENSTEMENTbull Interest rates Technology Cost of capital goods
Capacity of utilization
bull GOVERNMENT SPENDINGbull NET EXPORTSbull Domestic and foreign income Domestic and foreign
prices Exchange rates Government policy
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Why the Aggregate DemandCurve Slopes Downward
bull bull The reasons for its downward slope are
bull price-level effects
bull ndash Wealth Effect (Real WealthReal Balances)
bull ndash Interest Rate Effect
bull ndash International Trade Effect (Substitution)
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate demand curve
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Shifting theAggregate
Demand Curve
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of aChange inAggregateDemand
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
bull Demand-pull inflation rapid increases in AD outpace the growth of AS causing price level increases (inflation)
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Aggregate Supply
Aggregate Supply (AS) is the total of all the firm (market) supply curves It shows the quantity of real GDP produced at different price levels
Short-run AS slopes upward because an increase
in the price level (while production costs and
capital are held constant on the short-run) means
higher profit marginsmdashfirms will want to produce
more
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
AggregateSupply
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Shape of Short-run AS (SRAS)
bull bull In the short-run the capital stock (thebull number of factories and machines etc) arebull held constantbull bull Increasing the number of workers increasesbull output but at a diminishing ratebull bull Diminishing returns manifest as an ever
steeperbull SRAS curve
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
The Shape of theShort-Run Aggregate Supply Curve
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
The Shape of Long-run AS (LRAS)
bull bull Resource costs are NOT fixedbull ndash As prices rises workers will want higher wages andbull will eventually get thembull bull The amount of capital is not fixedmdashfirms canbull build new plants and buy new equipment over thebull long-runbull bull In the long-run AS is set by the productionbull possibilities curvemdashthe capacity of the economybull and is not affected by prices hence is vertical
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
The Shape of theLong-RunAggregate
Supply Curve
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Shifting the Long-RunAggregate Supply Curve
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Changes inAggregate
Supply
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
AggregateDemand and
SupplyEquilibrium
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
bull Demand-pull inflation is an inflation that results from anbull initial increase in aggregate demandbull Demand-pull inflation may begin with any factor thatbull increases aggregate demandbull Two factors controlled by the government are increases
inbull the quantity of money and increases in governmentbull purchasesbull A third possibility is an increase in exports
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
Initial Effect of anIncrease in AggregateDemandFigure 282(a) illustratesthe start of a demand-pullinflationStarting from fullemployment an increasein aggregate demandshifts the AD curverightward
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
Real GDP increases theprice level rises and aninflationary gap arisesThe rising price level is thefirst step in the demand pullinflation
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
Money Wage RateResponseFigure 282(b) illustratesthe money wage responseThe higher level of outputmeans that real GDPexceeds potential GDPmdashan inflationary gap
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
The money wages risesand the SAS curve shiftsleftwardReal GDP decreases backto potential GDP but theprice level rises further
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
A Demand-Pull InflationProcessFigure 283 illustrates ademand-pull inflationspiralAggregate demand keepsincreases and the processjust described repeatsindefinitely
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Demand-Pull Inflation
Although any of severalfactors can increaseaggregate demand to starta demand-pull inflationonly an ongoing increasein the quantity of moneycan sustain itDemand-pull inflationoccurred in the UnitedStates during the late1960s and early 1970s
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Cost-Push Inflation
bull Cost-push inflation is an inflation that results from an
bull initial increase in costsbull There are two main sources of increased
costsbull 1048707 An increase in the money wage ratebull 1048707 An increase in the money price of raw
materials such asbull oil
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull Unanticipated Inflation in the Labor Market
bull Unanticipated inflation has two main consequences in the
bull labor market
bull 1048707 Redistributes of income
bull 1048707 Departure from full employment
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflationbull Higher than anticipated inflation lowers the real wage ratebull and employers gain at the expense of workersbull Lower than anticipated inflation raises the real wage ratebull and workers gain at the expense of employersbull Higher than anticipated inflation lowers the real wage ratebull increases the quantity of labor demanded makes jobsbull easier to find and lowers the unemployment ratebull Lower than anticipated inflation raises the real wage ratebull decreases the quantity of labor demanded and increasesbull the unemployment rate
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull Unanticipated Inflation in the Market for Financialbull Capitalbull Unanticipated inflation has two main consequences in
thebull market for financial capital it redistributes income andbull results in too much or too little lending and borrowingbull If the inflation rate is unexpectedly high borrowers gainbull but lenders losebull If the inflation rate is unexpectedly low lenders gain butbull borrowers lose
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull When the inflation rate is higher than anticipated the real
bull interest rate is lower than anticipated and borrowers want
bull to have borrowed more and lenders want to have loanedbull lessbull When the inflation rate is lower than anticipated the realbull interest rate is higher than anticipated and borrowersbull want to have borrowed less and lenders want to havebull loaned more
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull Forecasting Inflationbull To minimize the costs of incorrectly anticipating inflationbull people form rational expectations about the inflation ratebull A rational expectation is one based on all relevantbull information and is the most accurate forecast possiblebull although that does not mean it is always right to thebull contrary it will often be wrong
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
Anticipated InflationFigure 287 illustrates ananticipated inflationAggregate demandincreases but the increaseis anticipated so its effecton the price level isanticipated
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull The money wage ratebull rises in line with thebull anticipated rise in the pricebull levelbull The AD curve shiftsbull rightward and the SASbull curve shifts leftward sobull that the price level rises asbull anticipated and real GDPbull remains at potential GDP
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull Unanticipated Inflationbull If aggregate demand increases by more than expectedbull inflation is higher than expectedbull Money wages do not adjust enough and the SAS curvebull does not shift leftward enough to keep the economy at
fullbull employmentbull Real GDP exceeds potential GDPbull Wages eventually rise which leads to a decrease in thebull SAS
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull The economy experiences more inflation as it returns to
bull full employment
bull This inflation is like a demand-pull inflation
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull If aggregate demand increases by less than expected
bull inflation is less than expectedbull Money wages rise too much and the SAS
curve shiftsbull leftward more than the AD curve shifts
rightwardbull Real GDP is less than potential GDPbull This inflation is like a cost-push inflation
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Effects of Inflation
bull The Costs of Anticipated Inflationbull Anticipated inflation occurs at full employment
with realbull GDP equal to potential GDPbull But anticipated inflation particularly high
anticipatedbull inflation inflicts three costsbull 1048707 Transactions costsbull 1048707 Tax effectsbull 1048707 Increased uncertainty
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Interest Rates and Inflation
bull How Interest Rates are Determinedbull The real interest rate is determined by investment
demandbull and saving supply in the global capital marketbull The real interest rate adjusts to make the quantity ofbull investment equal the quantity of savingbull National rates vary because of differences in riskbull The nominal interest rate is determined by the demand
forbull money and the supply of money in each nationrsquos moneybull market
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Interest Rates and Inflation
bull Why Inflation Influences the Nominal Interest Rate
bull Inflation influences the nominal interest rate to maintain an
bull equilibrium real interest rate
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Expectations and Inflation
bull If every firm expects every other firm to raise prices by 10 every firm will raise prices by about 10 This is how expectations can get ldquobuilt into the systemrdquo
bull In terms of the ADAS diagram an increase in inflationary expectations shifts the AS curve to the left
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Money and Inflation
bullHyperinflation is a period of very rapid increases in the price level
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Money and InflationbullAn increase in G with the money supply constant shifts the AD curve from AD0 to AD1
bullThis leads to an increase in the interest rate and crowding out of planned investment
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Money and Inflation
bullIf the Fed tries to prevent crowding it will increase the money supply and the AD curve will shift farther and farther to the right
bull The result is a sustained inflation perhaps hyperinflation
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Long-Run Aggregate Supply Curve
bull The vertical line reflecting the natural level of output that the economy will produce in the long run regardless of the price level (full employment is assumed)
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Phillips Curve
bull A curve showing an inverse relationship between inflation rate and unemployment rate in the short run
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
The Phillips Curve
Inflation
Unemployment
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
Supply Shock
bull A change in technology or supply of raw materials that shifts the short-run aggregate supply curve
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
An Adverse Supply Shock as a Cause of Cost-Push Inflation
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
- INFLATION
- Slide 2
- Inflation and the Price Level
- Deflation
- Slide 5
- Slide 6
- Causes of Inflation
- Stagflation
- Cost-Push Inflation
- Slide 10
- Demand-Pull Inflation
- Aggregate Demand
- Aggregate Supply
- Slide 14
- Aggregate Demand and Aggregate Supply Curves ( Short-Run amp Long-Run)
- Aggregate Demand Aggregate Supply and Business Cycles
- Demand Pull Inflation-Cost Push Inflation bull Demand-pull inflation inflation caused by increasing demand for output bull Cost-push inflation inflation caused by rising cost of production bull Examples bull Home prices bull Oil prices
- Aggregate Demand and Business Cycles
- Aggregate Supply and Business Cycles
- Factors that affect AD
- Why the Aggregate Demand Curve Slopes Downward
- Aggregate demand curve
- Shifting the Aggregate Demand Curve
- Effects of a Change in Aggregate Demand
- Slide 25
- Slide 26
- Slide 27
- Shape of Short-run AS (SRAS)
- The Shape of the Short-Run Aggregate Supply Curve
- The Shape of Long-run AS (LRAS)
- The Shape of the Long-Run Aggregate Supply Curve
- Shifting the Long-Run Aggregate Supply Curve
- Changes in Aggregate Supply
- Aggregate Demand and Supply Equilibrium
- Slide 35
- Slide 36
- Slide 37
- Slide 38
- Slide 39
- Slide 40
- Slide 41
- Slide 42
- Effects of Inflation
- Slide 44
- Slide 45
- Slide 46
- Slide 47
- Slide 48
- Slide 49
- Slide 50
- Slide 51
- Slide 52
- Slide 53
- Slide 54
- Interest Rates and Inflation
- Slide 56
- Expectations and Inflation
- Money and Inflation
- Slide 59
- Slide 60
- Slide 61
- Long-Run Aggregate Supply Curve
- Phillips Curve
- The Phillips Curve
- Supply Shock
- An Adverse Supply Shock as a Cause of Cost-Push Inflation
- Slide 67
-
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