EC140 Lecture Notes - Lecture 18: Output Gap, Nairu, Disinflation
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EC140 Full Course Notes
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Ec 140- lecture 18: inflation and disinflation; chapter 29. Inflation is the rise in the average level of prices. Commonly measured as the annual percentage change in cpi. First step- add sustained/ constant inflation to the model. Inflationary gap (y > y*) puts upward pressure on wages: recessionary gap (y < y*) puts downward pressure on wages, when y = y*, unemployment equals nairu (natural rate) Expectations of inflation: expected inflation is a starting point for wage negotiations (maintains real wage) Change in wages determined by these two effects. Backward- looking expectations: what has inflation been in the recent past, does not respond to expected policy changes. Forward- looking expectations: consider current economic conditions, account for changes in government policy, extreme version- rational expectations. Changes in wages caused by output gap and expected inflation. If wages rise, as curve shifts up (to the left: net effect is inflationary- causes price level to rise.
