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4 Cards in this Set
- Front
- Back
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If growth rate of Output and Inflation are both 0 in MR, a monetary expansion decreases nominal interest rate in MR? |
- In MR real interest rate goes back to natural rate - When Inflation = 0 nominal interest rate equals natural rate of interest, which equals nominal interest rate before shock |
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Increase in oil prices (markup) |
- Increase in markup over prices decreases real Wage => therefore PS shifts down - at initial equilibrium rate of u W real is than what wage setters expect => leading to increase of natural rate of unemployment as less workers accept lower real wage higher u is needed - Increase in markup => implies more market power and therefore less production and less demand for labor therefore increase in un. |
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IS Relation & Why DOWNWARD SLOPING |
IS closed economy - higher (i) lead to decrease in I which suggests lower Y in SR IS Open Economy - downward sloping in open economy because of Investment Mechanism & higher (i) appreciate currency and decreases N. |
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Outline impact of increase in nominal money growth |
- decrease in gm would increase it and rt due to decrease M/P - As long as rt is higher than natural rate => Y<Yn as investment demand is lower. - As Y<Yn => u>un => in turn decrease in inflation where inflation is smaller than expected inflation. - As inflation decreases => inflation eventually becomes lower than gm => leading to positive money growth. - When real money growth is positive => it starts to decrease and given expected inflation so does rt. - In MR rt goes back to initial value where Y=Yn, u=un & inflation no longer changing. -rt converges back to initial value and it converges to new lower value equal to rt+gm |
