expectations and macroeconomics chapter 16. 2 1999 south-western college publishing figure 16.1 the...
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3 ©1999 South-Western College Publishing Figure 16.2 ’65’70’75’80’85’90’951950’60’55 Rate of money creation (left scale) Government budget deficit (right scale) Percentage per year Money Growth and Debt Creation in the Postwar Period Percentage of GDP 2% per year 0% of GDPTRANSCRIPT
Expectations and Macroeconomics
Chapter 16
2
©1999 South-Western College Publishing
Figure 16.1
The Trade–Off Between Inflation and Unemployment
1949 - 1959
Unemployment rate (percent)
2
4
6
8
10
02 4 6 8 100
Nom
inal
wag
e in
flatio
n ra
te (p
erce
nt)
5.8%
2.4%
3
©1999 South-Western College PublishingFigure 16.2
’65 ’70 ’75 ’80 ’85 ’90 ’951950 ’60’55Rate of money creation (left scale)Government budget deficit (right scale)
Perc
enta
ge p
er y
ear
05101520
-5
Money Growth and Debt Creation in the Postwar Period
-20246
-4
Perc
enta
ge o
f GD
P
2% per year
0% of GDP
4
©1999 South-Western College PublishingFigure 16.3
- g
MM - g
ww =
SRAS cuts LRAS at w
w - g
AD cuts LRAS at M
M - g
Y/Y = g
Infla
tion
rate
(P/
P)
Growth rate of output (Y/Y)
LRAS
SRAS AD
Fixing the Position of the Aggregate Demand and Supply Curves
5
©1999 South-Western College PublishingFigure 16.4
SRAS
AD0
LRASIn
flatio
n ra
te (
P/P)
Growth rate of output (Y/Y)
Short Run Effects of an Increase in the Rate of Money Creation
AD1
Y/Y)1Y/Y)0 = g
P/P)1
P/P)0
6
©1999 South-Western College PublishingFigure 16.5
Infla
tion
rate
(P/
P)
Growth rate of output (Y/Y)
Short Run Effects of an Increase in the Rate of Money Creation
AD1
Y/Y)1Y/Y)2 = g
P/P)1
P/P)2
AB SRAS1
SRAS2
7©1999 South-Western College PublishingFigure 16.6
P/P)3
AB
C
Growth rate of output (Y/Y)
Infla
tion
rate
(P/
P)
Determining Inflation When Expected Inflation Is Too Low
P/P)2
P/P)E = P/P)1
g
SRASAD1
AD2
8©1999 South-Western College Publishing
Figure 16.7
Determining Inflation When Expected Inflation Is Too High
P/P)5
Growth rate of output (Y/Y)
Infla
tion
rate
(P/
P)P/P)E = P/P)4
g
SRAS
P/P)6
AD1
AD2
F
ED
9©1999 South-Western College PublishingFigure 16.8
Growth rate of output (Y/Y)g
SRAS
The Rational Expectation of InflationAD2
ADAD1
I
GH
PP
E PP 7
=
- g MM=
- g MM
PP 9
PP 8
Infla
tion
rate
(P/
P)
The rational expectation of price inflation is equal to
10
©1999 South-Western College PublishingFigure 16.10A
Removing Inflation from the EconomyPanel A: Money Growth Rate
Perc
enta
ge p
er y
ear
6
7
8
9
10
5
41977 ’78 ’79 ’80 ’81 ’82 ’83
11
©1999 South-Western College PublishingFigure 16.10B
Removing Inflation from the EconomyPanel B: Interest Rate
Perc
enta
ge p
er y
ear
8
10
12
14
16
6
41977 ’78 ’79 ’80 ’81 ’82 ’83
12
©1999 South-Western College PublishingFigure 16.10C
Removing Inflation from the EconomyPanel C: GDP Growth Rate
Perc
enta
ge p
er y
ear
0
2
4
6
-2
-41977 ’78 ’79 ’80 ’81 ’82 ’83
13
©1999 South-Western College PublishingFigure 16.10D
Removing Inflation from the EconomyPanel D: Inflation Rate
Perc
enta
ge p
er y
ear
6
7
8
9
10
5
41977 ’78 ’79 ’80 ’81 ’82 ’83
END