Macroeconomics Ch. 13

Front 1

inflation

Back 1

a continuous rise in the price level

Front 2

rational expectations

Back 2

the expectations that economists' model predicts

Front 3

adaptive expectations

Back 3

expectations based in some way on the past

Front 4

extrapolative expectations

Back 4

expectations that a trend will continue

Front 5

inflation

Back 5

= nominal wage increase - productivity growth
(if wages and productivity both go up 2%, there's no inflationary pressure)

Front 6

deflation

Back 6

a sustained fall in the price level

Front 7

real interest rate (in deflation)

Back 7

= nominal interest rate + deflation
(nominal interest rate will not drop below 0 during deflation because ppl hold onto $ instead of bond, therefore, central bank cannot lower real interest rate to stimulate economy)

Front 8

2 theories of inflation

Back 8

1. quantity theory
2. institutional theory

Front 9

quantity theory

Back 9

the theory of inflation that emphasizes the connection between money and inflation
(money supply increases, price level increases;
demand-pull; Classical)
MV -> PQ
(focuses on the real economy, i.e. supply-side;
primary concerned with long run)

Front 10

institutional theory

Back 10

the theory of inflation that emphasizes market structure and price-setting institutions and inflation
(price increases, govt prints more $;
cost-push; Keynesian)
MV <- PQ

Front 11

MV = PQ

Back 11

equation of exchange: an equation stating that the quantity of money times velocity of money equals the price level times the quantity of real goods sold
(this is straightly a quantity theory thing)

Front 12

M

Back 12

Quatity of money

Front 13

V

Back 13

Velocity of money
(# of times per year, on average, a dollar goes around to generate a dollar's worth of income, OR amount of income per year generated by a dollar of money)

Front 14

P

Back 14

Price level

Front 15

Q

Back 15

quantity of real goods sold (real output of the economy/real GDP)

Front 16

PQ

Back 16

economy's nominal output (nominal GDP)

Front 17

2 assumptions of the quantity theory

Back 17

1. velocity is constant
(money is spent only so fast; and how fast is determined by the economy's institutional structure. This structure changes slwoly, therefore, velocity won't fluctuate very much)
2. real output (Q) is independent of the money supply (autonomous)

Front 18

quantity theory of money

Back 18

MV -> PQ
(assuming that V and Q are constant, price level varies in response to changes in the quantity of money)
Also, %changeM -> %changeP

Front 19

inflation tax

Back 19

an implicit tax on the holders of cash and the holders of any obligations specified in nominal terms (reduces the value of cash and other nominal obligations)

Front 20

monetary regimes/feedback rules

Back 20

hard and fast rules
(i.e. $ supply will be contracted by 1%, or the interest rate will be raised by 1.5 percentage points) when inflation rises by 3%, and the $ supply will be expanded by 1% when real output increases but remains below potential output.
monetary regimes/feedback rules takes monetary policy out of the hands of the politicians)

Front 21

policy implications of institutional theory

Back 21

institutional theorists suggest that contractionary monetary policies be used in combinatino with additional policies that directly slow down ifnlation at its source, i.e. income policy

Front 22

income policy

Back 22

a policy that places direct preesure on individuals to hold down their nominal wages and prices

Front 23

demand-pull pressure

Back 23

when the majority of industries are at close to capacity and they experience increases in demand

Front 24

demand-pull inflation

Back 24

inflation that occurs when the economy is at or above potential output;
generally characterized by shortages of goods and labors (firms can raise $ and still sell goods and labors can raise $ and still have work)

Front 25

cost-pull pressure

Back 25

price rises not related to demand pressure

Front 26

cost-pull inflation

Back 26

infaltion that occurs when the economy is below potential output
(when significant proportions of the markets or 1 v impt market experience $ rise not related to demand pressure, i.e. oil)

Front 27

short-run Phillips curve

Back 27

a downward-sloping curve showing the relationship bewteen inflation and unemployment when expectations of inflation are constant
(unemployment on x-axis, unemployment on y; high inflation, low unemployment; low inflation, high unemployment) (expectation of inflation are fixed, thus can differ from actual inflation)

Front 28

stagflation

Back 28

the combination of high and accelerating inflation and high unemployment

Front 29

long-run Phillips curve

Back 29

a vertical curve at the unemployment rate consistent with potential output
(expectations of inflation are equal to actual inflation on the long-run curve)

Front 30

Republicans

Back 30

often advised by supporters of the quantity theory generally favored contractionary monetary and fiscal policy (high unemployment, low inflation)

Front 31

Democrats

Back 31

often advised by supporters of the institutionary theory, generally favored expansionary monetary and fiscal policies (low unemployment, high inflation)

Front 32

economy on left of long-run Phillips curve

Back 32

- unemployment below target rate
- upward pressure on prices

Front 33

economy on right of long-run curve

Back 33

- unemployment above target rate
- downward pressure on prices