ECON 102 Chapter Notes - Chapter 30: Output Gap, Nairu, Potential Output
Chapter 30: Inflation and Disinflation
30.1 Adding Inflation to the Model
★ Inflation: rise in the general price level P
★ Temporary/Transitory Inflation: may be caused by rise in tax rates, temporary rise in oil
prices, increase in interest rates
○ One time P increase
○ Y returns to Y* at higher prices
★ Sustained/Persistent Inflation: period of continuous rising prices usually caused by wage
price increase and inflation expectations (ex.4% inflation this year, people expect 4%
inflation next year)
○ Sustained + constant
○ Caused by expectation inflation
★ Unanticipated Inflation: when inflation is volatile from year to year, becomes difficult for
individuals/businesses to predict future inflation rates
○ Reduction in purchasing power
○ Allocation of resources -- interfere with P signal -- cause an arbitrary
redistribution of income
○ Creates uncertainty -- affects I
★ AD/AS shocks influenced the values of both real GDP and the price level
○ the economys adjustment process tended to push the economy back toward the
potential level of real GDP with a stable price level
○ any inflation that we have so far seen in our macroeconomic model was
temporary- it existed only while the economy was adjusting toward its long-run
equilibrium
★ in supply ↓ cost push inflation in demand ↓
demand pull inflation
★ Why Wages Change
○ Wages and the Output Gap
⬥ 3 ways changes in nominal (money) wages were influenced by the output
gap
● Excess demand for labor associated with recessionary gap (Y>Y*)
puts upward pressure on nominal wages
● Excess supply labor associated with recessionary gap (Y<Y*)
downward pressure on nominal wages, though adjustment may
be very slow
● Absence or either inflationary or recessionary gap (Y=Y*) implies
demand forces exerting no pressure on nominal wages
⬥ When GDP is equal to Y*, the unemployment rate is said to be equal to
NAIRU (non-accelerating inflation rate of unemployment), designated by
U*
● NAIRU is not zero, when Y=Y*, it may cause frictional/structural
unemployment (ex.people moving between jobs or regions)
⬥ When real GDP exceeds potential (Y>Y*), unemployment rate will exceed
the NAIRU (U<U*)
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Document Summary
Inflation: rise in the general price level (cid:470)p(cid:471) Temporary/transitory inflation: may be caused by rise in tax rates, temporary rise in oil prices, increase in interest rates. Y returns to y* at higher prices. Sustained/persistent inflation: period of continuous rising prices usually caused by wage price increase and inflation expectations (ex. 4% inflation this year, people expect 4% inflation next year) Unanticipated inflation: when inflation is volatile from year to year, becomes difficult for individuals/businesses to predict future inflation rates. Allocation of resources -- interfere with (cid:470)p(cid:471) signal -- cause an arbitrary redistribution of income. (cid:800) in supply cost push inflation (cid:798) in demand demand pull inflation. 3 ways changes in nominal (money) wages were influenced by the output gap. Excess demand for labor associated with recessionary gap (y>y*) puts upward pressure on nominal wages. Excess supply labor associated with recessionary gap (y
