Download - Figure 12.1 The Fed Reaction Rule. Figure 12.2 Changing AD Equilibrium due to the Fed Reaction
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Interest rate (r)
Infla
tion
rate
(π
)Fed Reaction Rule
If the Fed sees the inflation rate rising…
…it moves to raise interest rates
r0 r1
π1
π0
B
A
Figure 12.1 The Fed Reaction Rule
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45
Income
Agg
rega
te D
em
and
and
Out
put
AD1 (with new, higher interest rate, r1)
E1
E0
AD0 (with old interest rate, r0)
Y1 Y0
A
B
Figure 12.2 Changing AD Equilibrium due to the Fed Reaction
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Output (Y)
Infla
tion
rate
(π
)
Aggregate Demand Equilibrium (ADE)
If inflation rises…
…the Fed takes action to “cool off” the economy
Y1
π1
π0
Y0
A
B
Figure 12.3 The Aggregate Demand Equilibrium Curve
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Output (Y)
Infla
tion
rate
(π
)
ADE0
ADE1
Figure 12.4 The Effect of Expansionary Fiscal Policy or Increased Confidence
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Output (Y)
Infla
tion
rate
(π
)
ADE1
ADE05% target
10% target
Figure 12.5 The Effect of a Lower Target Inflation Rate
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Output (Y)
Infla
tion
rate
(π
)
Aggregate Supply Response (ASR)
Maximum Capacity
Y*
Recession
Wage-Price Spiral
Figure 12.6 The Aggregate Supply Response (ASR) Curve
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Output (Y)
Infla
tion
rate
(π
)ASR0
ASR1
Figure 12.7 An Increase in Inflationary Expectations
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Output (Y)
Infla
tion
rate
(π
)
ASR1
ASR0
Expansion of Maximum Capacity
Figure 12.8 A Beneficial Supply Shock
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Output (Y)
Infla
tion
rate
(π
)
ASR
Y*
Recession
ADEE0
Figure 12.9 An Economy in Recession
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0
1
2
3
4
5
6
0 1 2 3 4 5 6 7 8
1963
19651964
Unemployment Rate (percent)
Infla
tion
(pe
rce
nt p
er
yea
r)
Figure 12.10 Unemployment and Inflation in the United States, 1963-1965
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Output (Y)
Infla
tion
rate
(π
)
ASR
Y*
Recession
ADE0
ADE1E0
E1
Figure 12.11 Expansionary Fiscal Policy When the Economy Starts in a Recession
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0
1
2
3
4
5
6
0 1 2 3 4 5 6 7 8
1963
19691968
1967
1966
19651964
Unemployment Rate (percent)
Infla
tion
(per
cent
pe
r ye
ar)
Figure 12.12 Unemployment and Inflation in the United States, 1963-1969
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Output (Y)
Infla
tion
rate
(π
)ASR
Y*
ADE1
ADE0
E1
E0
Wage-Price Spiral
Figure 12.13 Expansionary Fiscal Policy When the Economy is at Full Employment
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0
1
2
3
4
5
6
0 1 2 3 4 5 6 7 8
1963
19691968
1967
1966
19651964
Unemployment Rate (percent)
Infla
tion
(pe
rce
nt p
er
yea
r)
1970 1971
1972
1973
Figure 12.14 Unemployment and Inflation in the United States, 1963-1973
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Output (Y)
Infla
tion
rate
(π
)
ASR0
Y*
ADE0
ADE1
E0
E1ASR1
Figure 12.15 Contractionary Fiscal Policy and Rising Inflationary Expectations
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0123456789
10
0 1 2 3 4 5 6 7 8 9 10
Infla
tion
(per
cent
per
yea
r)
Unemployment Rate (percent)
19701969
1975
1963
1973
1974
1976
Figure 12.16 Unemployment and Inflation in the United States, 1963-1976
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Output (Y)
Infla
tion
rate
(π
)
ASR0
ASR1
ADE
E1
E0
Lower Capacity
Figure 12.17 The Immediate Effect of the Oil Price Shock
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Output (Y)
Infla
tion
rate
(π
)
ASR0
ASR1
ADE
E1
E0
12.18 Medium-Run Adjustment to the Oil Price Shock
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0123456789
10
0 1 2 3 4 5 6 7 8 9 10
Infla
tion
(pe
rce
nt p
er
yea
r)
Unemployment Rate (percent)
19701969
1975
1983
1963
1981
Figure 12.19 Unemployment and Inflation in the United States 1963-1983
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Output (Y)
Infla
tion
rate
(π
)
ASR
Y*
Recession
ADE0
ADE1
E0E1
Figure 12.20 The Immediate Effect of a Lowered Inflation Target
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Output (Y)
Infla
tion
rate
(π
)
ASR0
Y*
Recession
ADE0
E0
E1ASR1
ADE1
Figure 12.21 The Medium-Run Effect of a Lowered Inflation Target
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0123456789
10
0 1 2 3 4 5 6 7 8 9 10
Infla
tion
(pe
rce
nt p
er
yea
r)
Unemployment Rate (percent)
2000
1998
1984
1992
1989
Figure 12.22 Unemployment and Inflation in the United States, 1983-2004
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0
0.5
1
1.5
2
2.5
3
3.5
4
0 1 2 3 4 5 6 7 8 9 10
Infla
tion
(pe
rce
nt p
er
yea
r)
Unemployment Rate (percent)
1992
1998
1999
1994
1997
Figure 12.23 Unemployment and Inflation in the United States, 1992-1999
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Output (Y)
Infla
tion
rate
(π
)
ASR1
ASR0
ASR2
ADE
E0
E2
E1
Higher Capacity
Figure 12.24 The Effects of Technological Innovation
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Output (Y)
Infla
tion
rate
(π
) Classical ASR
Y*
ADE
Figure 12.25 The Classical Aggregate Supply Curve
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Year
Peak Peak
Trough
GDP
Y*
A A
B
Output (Y)
Infla
tion
rate
(π
)
ASR
Y*
ADE
ADE
A
B
(a) (b)
Figure 12.26 Business Cycles
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Output (Y)
Infla
tion
rate
(π
)
Y*
ADE1
ADE0
E1
E0
Classical ASR
ASR1
ASR0
Figure 12.27 Expansionary Monetary Policy with Rational Expectations