Econ Test

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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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