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ECON 1500 Exam Four Study Guide
Inflation and the Phillips Curve (Colander 13)
• Definition of Inflation
Continual rise in the price level
• Three types of expectations for inflation
Rational expectations: whatever the model says
Adaptive expectations: based on past inflation rates
Extrapolative: based on trends
• Who benefits/loses from inflation? (Distributional effects)
Those who can raise wages and prices and keep their jobs benefit from inflation
• Quantity Theory of Money : MV=PY
M= Quantity of money
V= Velocity
P= Price level
Y= real output
• Assumptions of the Quantity Theory of Money
First: V is held constant
Second: Y is independent of the money supply
Third: Quantity theory of money- causation goes from money to prices
• Quantity Theory of Money in the short-run and long-run. Which variables are held constant and what are the implications?
• Why would a government want to inflate?
Lowers the real deficit
• Why inflation/expectations limits the effectiveness of monetary policy
• Demand-pull and cost-push inflation
Demand-pull: you are at the potential output, shortage of workers and goods
Cost-push: you are below the potential output, prices increase not due to economic pressures
• Phillip’s Curve
• Short-run Phillip’s Curve relationship with expectations
Curve is downward sloped keeping the expectations constant
• Long-run Phillip’s Curve relationship with unemployment/NAIRU
Curve is vertical allowing expectations to change
• Stagflation
Combination of high inflation and high unemployment
• Implications from Phillip’s Curve if people perfectly adjust their expectations to government expansionary monetary policy
Fiscal Policy and Public Finance (Colander 14)
• Classical view of public finance (sound finance)
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