EC140 Lecture Notes - Lecture 13: Potential Output, Monetary Policy, Stagflation
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What is inlaion: inlaion is a rise in avg level of prices, commonly measured as annual percent of cpi, anicipated vs. unanicipated inlaion, first step is to add sustained/constant inlaion to the model. Recessionary gap downward pressure on wages. When y = y*, unemployment = nairu (neutral rate) Does not respond to expected policy changes. Changes in wages caused by an output gap and expected inlaion. If wages rise, as curve shits up (let) and price level rises. If wages fall, as curve shits down (right) and prices fall. If non-wage prices rise the as curve shits and induces inlaion. Set overnight rate so inlaion meets expectaions. Leads to an increase in money supply that matches the increase in demand. When expectaions are higher than desired, could lead to a recession. If the boc does not increase money supply the as curve shits let, cause temporary inlaion.
