ME 1 MPS MT MPC MPS Base year 50 50 1 x

ME = 1/MPS MT=MPC/MPS

Base year[$50/$50=1 x 100=100] Formulas $46/$50 x 100=92[deflation of 8%] Price of Market Basket(2001) Basket(2001 [nominal GDP] = Price of same Market Basket(1998)x 100; [GDP Deflator] in the base year (1998) GDP Price Index $64 [Real GDP] $50 x 100=128 [$64/128 x 100 = $50] $6, 737[1994]/126. 1[1987($4, 540)]x 100 = $5, 343 [+$803. ] “Real GDP deflates nominal GDP to actual value”[takes the air out of the nominal balloon] Unemployment Labor Force x 100 = [Employed + unemployed] unemployment rate; 5, 655, 000 140, 863, 000 x 100 = 4% [135, 208, 000+5, 655, 000] [2000] Okun’s Law or GDP gap)=Unemployment Rate over 6% x 2%; 7. 5%, so 1. 5 x 2% = 3%. gap Or, $3 billion GDP Gap[$100 billion nominal GDP x. 03% = $3 billion]. (2000 -later year) (1999 -earlier year) [*Change/original x 100] Current year’s index – last year’s index 172. 2 -166. 6(5. 6) C. P. I. = Last year’s index(1999 -earlier year) x 100; 166. 6 x 100 = 3. 4% _____________ 70 “Rule of 70” = % annual rate of increase (3%) = 23 years “Real Income” measures the amount of goods/services nominal income will buy. [% change in real income = % change in nominal income - % change in PL. ] PL 5% 10% 5%

Real GDP = Nominal GDP/Index X 100 “Nominal” “Real” $9, 299. 2[1999]/104. 77[1996] x 100 = $8, 875. 8 [So, +$1, 062. 6] “Real GDP deflates nominal GDP to actual value” [takes the air out of the nominal balloon] $5, 250. 8 $3, 774. 7 $5, 671. 8 4, 848 4, 839 3, 492 108. 5 x 100=$_____ 108. 1 x 100=$_____ 117. 0 x 100=$_____ 1. Using the above formula, what is the real GDP for 1994 if nominal GDP was $6, 947 trillion and the GDP deflator was 126. 1? ($6, 611/$5, 610/$5, 509) trillion. [$6, 947/126. 1 x 100 = $5, 509 trillion 2. For 1996, what would real GDP be if nominal GDP were $7, 636 trillion and the GDP deflator were 110. 2? ($6, 929/$9, 628/$6, 928). [$7, 636 trillion/110. 2 x 100 = $6, 929 trillion]

Unemployment 5, 655, 000 Unemployment Rate = Labor Force x 100; 4. 0% = 140, 863, 000 x 100 [Employed + unemployed] [135, 208, 000+5, 655, 000] 6 In Forney, 42 are unemployed & 658 are employed. The unemployment rate is __%. 5 One mil. are unemployed & 19 mil. are employed. The unemploy. rate is __%. 1. If the total population is 280 million, and the civilian labor force includes 129, 558, 000 with jobs and 6, 739, 000 unemployed but looking for jobs, then the employment rate would be ____%. 4. 9 [6, 739, 000/136, 297, 000 x 100 = 4. 9%]

AD 2 3% AD 1 AS FE GDP “Bull’s Eye” 1% 5% Cyclical(“real”) Unempl. 11% 6% [Frictional+Structural] 10%[5%x 2=10%] Negative Gap Y*F YR [Okun’s Law] Arthur Okun YP YA YA [GDP Gap = unemployment rate over 6% x 2] 2 $9 Tr. $10 tr. E 2 Recessionary Gap(YR) Potential output ($10) exceeds actual output($9). Actual unemploy. rate(11%) exceeds Potential unemp. rate(6%). Unemployment Rate [Let’s say that Nominal GDP is $100 billion. ] [And if it were $200 billion? ] billion 1 1. 7%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. 2 2 2. 8%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. 4 4 2 3. 13%; real unemployment is __%; % gap is 14 %; output forgone is ___ bil. ___ 7 14 4. 14%; real unemployment is __%; % gap is ___ %; output forgone is ___ bil. 8 16 16

[Change/Original X 100 = inflation] So, 3. 3% increase in Social Security benefits for 2007 (2006 -later year) (2005 -earlier year) Current year’s index – last year’s index 199. 1 – 192. 7 [6. 7] C. P. I. = Last year’s index(2006 -earlier year) x 100; 192. 7 x 100 = 3. 3% 130. 7 -124. 0(6. 7) 116 -120(-4) 124. 0 x 100 = ____ -3. 3% 5. 4% 120 x 100 = ____ 333 -300(33) 11% 300 x 100 = ____ 1. The CPI was 166. 6 in 1999 and 172. 2 in 2000 Therefore, the rate of inflation for 2000 was (2. 7/3. 4/4. 2)% [5. 6/166. 6 x 100 = 3. 4%] 2. If the CPI falls from 160 to 149 in a particular year, the economy has experienced (inflation/deflation) of (5/-4. 9/-6. 9)%. [-11/160 x 100 = -6. 9%] 3. If CPI rises from 160. 5 to 163. 0 in a particular year, the rate of inflation for that year is (1. 6/2. 0/4. 0)%.

Consumers in this economy buy only two goods–hot dogs & hamburgers. Step 1. Fix the basket. What percent of income is spent on each. Consumers in this economy buy a basket of: 4 hot dogs and 2 hamburgers Step 2. Find the prices of each good in each year. Year Price of Hot Dogs Price of Hamburgers 2001 $1 $2 2002 $2 $3 Step 3. Compute the basket cost for each year. 2001 ($1 per hot dog x 4 = $4) + ($2 per hamburger x 2 = $4), so $8 2002 ($2 per hot dog x 4 = $8) + ($3 per hamburger x 2 = $6), so $14 Step 4. Choose one year as a base year (2001) and compute the CPI 2001 ($8/$8) x 100 = 100 2002 (14/$8) x 100 = 175 Step 5. Use the CPI to compute the inflation rate from previous year 2002 (175/100 x 100 = 175%) or to get actual % (175 -100)/100 x 100 =75% Or, Change $14 -$8 ($6) Original $8 x 100 = 75%

(42%) 18. Suppose that a typical consumer buys the following quantities of these three commodities in 2000 and 2001 Commodity Food Clothing Shelter Quantity 5 units 2 units 3 units 2000 per Unit Price $6. 00 $7. 00 $12. 00 2001 per Unit Price $5. 00 $9. 00 $19. 00 Which of the following can be concluded about the CPI for this individual from 2000 to 2001? 2001 a. It remained unchanged. c. it decreased by 20% b. It decreased by 25%. d. It increased by 20% e. It increased by 25%. (Answer) Year 1 [2000]: [5 food x $6 = $30; 2 clothing x $7 = $14; 3 shelters x $12 = $36, for dollar value of $80. CPI = 100 ($80/$80 x 100 = 100 for 2000)] Year 2 [2001]: [5 food x $5 = $25; 2 clothing x $9 = $18; 3 shelters x $19 = $57, for dollar value of $100. CPI =125 Change Original = $100 -$80 [$20] $80 x 100 = 25%; so the CPI for this individual is 25%.

70 _____________ “Rule of 70” = % annual rate of increase (3%) = 23 years [Inflation (prices to double)] 70 70 70 [Investments to double] 6 years 9 = _____ [GDP (standard of living) to double] 8 years 7 years 10 = ______ 12 = _____ 70

[Nominal income – inflation rate = Real Income] 16% Nominal Income 6% Inflation Premium = 10% Real Income

APC and APS APC - percentage of income (“Y”) consumed. APS – percentage of income (“Y”) saved. APC = C/Y(DI)=$48, 000/$50, 000 =. 96 1 APS = S/Y(DI)= $2, 000/$50, 000 =. 04 APC = C/Y=$52, 000/$50, 000 = 1. 04 1 APS = S/Y= -$2, 000/$50, 000 = -. 04 “Econ, APS=S/Y “High maintenance Econ teacher” What in the world is AE? AE=GDP APC=C/Y

MPC, MPS, & the Multiplier ME=1/MPS MPC - % change in Y consumed. MPS - % change in Y saved. MPC = C/ Y = $750/$1, 000 =. 75 MPS = S/ Y = $250/$1, 000 =. 25 Multiplier [1/MPS]=1/. 25=$1/. 25 = “ME” of 4 [MPC is important for G in policy making decisions. ] *The ME is the reciprocal of the MPS. The “ME” works like a concentric circle. $20 billion “G” [with ME of 4] 15 bil. 11. 25 bil. 8. 5 bil.

ME MPC. 90. 80. 75. 60. 50 1/MPS 1/. 10 1/. 25 1/. 40 1/. 50 = ME = 10 = 5 = 4 = 2. 5 = 2

MT MPC. 90. 80. 75. 60. 50 = MT -MPC/. 10 = -9 -MPC/. 20 = -4 -MPC/. 25 = -3 -MPC/. 40 = -1. 5 -MPC/. 50 = -1 -MPC/MPS When the G gives a tax cut, the MT is smaller than the ME because a fraction [MPS] is saved and only the MPC is initially spent. So, the MT = -MPC/MPS.

The ME, MT, & MBB Multipliers ME [C, Ig, G, or Xn] = 1/MPS = 1/. 25 = 4 G increase of $20 bil. will incr Y by $80 bil. [$20 x 4=$80] $20 x 4=$80 And a G decrease of $20 bil. will decrease Y by $80 bil. [-$20 x 4=-$80 bil. ] bil. So, MT = -MPC/MPS = -. 75/. 25 = -3 T decrease of $20 bil. will incr Y by $60 bil. [-$20 x-3=$60] bil. -$20 x-3=$60 And a T increase of $20 bil. will decr Y by $60 bil. [$20 x-3=-$60] $60 So, MBB = 1 X ( G) So, an increase in G&T of $20 bil. will incr Y by $20 bil. [1 X$20=$20] And a decrease in G&T of $20 bil. will decr Y by $20 bil. [1 X-$20=-$20] bil. $20 Any increase in Any decrease in expenditures x the M will increase GDP. expenditures x the M will decrease GDP.

Dennis Rodman deposits $1 with A 10% RR Rodman’s . 10 90 cents RR Excess Reserves Total (Actual) Reserves One Dollar One bank’s loan becomes another bank’s DD. PMC = M x ER, so 10 x. 90 =$9 TMS = PMC[$9] + DD[$1] = $10 [MS = Currency + DD of Public]

Rodman’s Bank Borrows $1 From The Fed [10% RR] Fed Rodman’s Bank 0 One Dollar RR Excess Reserves Total(Actual) Reserves One Dollar PMC = M x ER, so 10 x $1 = $10 TMS [$10] = PMC[$10] [MS = Currency + DD of Public]

MULTIPLE DEPOSIT EXPANSION PROCESS RR= 20% Amount bank Bank Acquired reserves Required and deposits reserves Excess reserves A $100. 00 $20. 00 $80. 00 B 80. 00 16. 00 64. 00 C 64. 00 12. 80 51. 20 D 51. 20 10. 24 40. 96 E 40. 96 8. 19 32. 77 6. 55 26. 22 Susie Rah F G 26. 22 5. 24 20. 98 I’m doing H 20. 98 4. 20 16. 78 the econ rap. I 16. 78 3. 36 13. 42 J 13. 42 2. 68 10. 74 Ronald Mc. Donald K 10. 74 2. 15 8. 59 L 8. 59 1. 72 6. 87 M 6. 87 1. 37 5. 50 N 5. 50 1. 10 4. 40 Other banks 21. 97 4. 40 17. 57 Reese Witherspoon P MC in the banking system [Mx. ER] Paris Hilton can lend - New money created $80. 00 64. 00 51. 20 1 st 40. 96 10 32. 77 $357 26. 22 of 20. 98 the 16. 78 $400 13. 42 10. 74 8. 59 6. 87 5. 50 4. 40 17. 57 $400. 00 TMS = $500. 00

C A P I T A L G O O D S A B G C F More or better resources or better technology D E Consumer Goods 40. At what letter is there unemployment [recession]? F recession 41. What letters represent resources being used in their most productive manner? [full employment, manner full production, and best available technology] A, B, C, D, E 42. What letter represents an improvement in technology, technology therefore a new PPC frontier line? G 43. The (straight line/curve) illustrates the “law of increasing cost”? 44. The (straight line/curve) illustrates the “law of constant cost. ” 45. At what letter would there be the most economic growth in the future if a country were producing there now? A 46. What is the opportunity cost when moving from “C” to “D”; Capital when moving from E to B; Consumer B & do we have to give anything up when moving from F to D? no D

Appreciation of the Dollar Increase in taste for U. S. goods Increase in U. S. Interest Rates Decrease in U. S. Price Level Decrease in U. S. Growth Rate The Market for Dollars Yen Price of Dollar Exchange Rate: $1 = ¥ 100 P Decrease in U. S. Currency Price D 1 $ D 2 Y looking for $’s Y 150 Y 100 D A S$ $’s looking for Y E 2 Yen depreciates Yen E 1 appreciates Y 50 E 3 Depreciation of Dollar Decrease in Taste 0 Decrease in In. Rates Increase Price Level Increase Growth Rate Increase in Currency Price D D 3 QE A Quantity of Dollars

Yen Price of Dollar Appreciation/Depreciation [Exchange Rate: $1 = Y 100] D 1 $ Price D 2 S$ Y 150 Y 100 Y looking for $’s D A E 2 Yen depreciates Yen E 1 appreciates Y 50 E 3 X M D + + + $’s looking for Y - D 3 Quantity of Dollars Taste [products/assets] Interest Rates Price Level Growth Rate Currency Price A M X + + + -

AD [C I G -X ] Price Level P] SRAS [REcost] [Production PLe Ye Real Domestic Output

[caused by “C+Ig+G+Xn”] AD 1 AD 2 LRAS Increase in AD Price Level 1. Increase in Consumption 2. Increase in Investment 3. Increase in Gov. spending A. On military spending B. On the infrastructure C. On health care 4. Increase in Net exports [Xn] A. Dollar depreciates B. Trade partners Y’s rise YR YF Real Domestic Output, GDP SRAS

[caused by “C+Ig+G+Xn”] AD 2 1. 2. 3. AD 1 LRAS Decrease in AD Price Level Decrease in Consumption Decrease in Investment Decrease in Gov. spending A. On military spending B. On the infrastructure C. On health care 4. Decrease in Net exports [Xn] A. Dollar appreciates B. Trade partners Y’s fall YR YF Real Domestic Output, GDP SRAS

[caused by “REP”] Increase in AS [“REP”] Resource Cost [domestic] a. More land, labor, capital & entrepreneurs b. # of sellers increase Resource Cost [overseas] PL c. Imported inputs decrease in price d. Dollar appreciates Environment [legal-institutional] a. Increase in subsidies b. Decrease in bus. regulations c. *Decrease in business taxes Productivity Increase in productivity AD AS 1 AS 2 RGDP

[caused by “REP”] Decrease in AS [“REP”] Resource Cost [domestic] a. Land, labor, & capital become more scarce b. Number of sellers decrease Resource Cost [overseas] PL c. Imported inputs increase in price d. Dollar depreciates AD AS 3 AS 1 Environment [legal-institutional] a. Decrease in subsidies b. Increase in bus. regulations c. *Increase in business taxes Productivity Decrease in productivity RGDP

AD PL 1 PL 2 PL AQD [In ve rse ] AQD 1 AQD 2

PL 1 PL 2 AS [DIRECT ] AQS 2 AQS 1

C 1. “Non price Level” change-either C, Ig, G, or Xn Consumption 2. “Whole AD curve” shifts [There is a change in AQD but it is not caused by Mariah Carey Concert a change in price level. ] Ig AD 1 AD 2 AD 3 G PL Let there be more military weapons XN Chevy Ferrari [Exports-Imports] AQD 3 AQD 1 AQD 2 RDO

Change in AS 1. “Non price level change”. Either R, Anything that lowers R E, or P 2. “Whole AS curve” shifts. the cost of production 3. AQS changes but is not caused bywill shift AS PL a change in right. AS Shifters(REP) 1. Resource cost 2. Environment [legal-institutional environment for businesses change, Increase in the availability of Resources affecting production costs [subsidies, bus. taxes, regulations] 3. Productivity PL 1. Lower business taxes 2. Decrease in regulations 3. Increase in subsidies AS 3 AS 1 AS 2 So – AS Shifters are REP You save money. We don’t require dental or medical insurance. You don’t have to pay us a pension and we don’t take sick days. And – we can dance. Environment [Legal-institutional] Increase in Productivity AQS 3 AQS 1 AQS 2

AE[C+Ig+G] AD 2 LRAS S AE 2[C+Ig+G] AE 1[C+Ig] o 45 Y R Y* Real GDP AD 1 PL PL YR Y* Real GDP

AE[C+Ig+G] AE 1[C+Ig 1] AE 2[C+Ig 2] o 45 • • • LRAS SRAS AD 1 S Y * YI RGDP AD 2 PL PL Y * YI RGDP Weaknesses [Limitations] of the AE Model Does Not Show Price Level Changes Does not show Demand-Pull Inflation Does Not Deal With Cost-Push Inflation [Stagflation] It ignores premature demand-pull inflation [Inflation just before FE GDP] It does not allow for “self-correction”

AE[C + Ig] Multiplier=4 (billions of dollars) AE[C+Ig] [“Basic” or “Simple” economy] S Private - Closed Consumption Equilibrium 470 Ig = $20 Billion 450 390 + 20 370 o C + Ig 45 Ig o +20 +60 more C =$450 Billion [increase 80] Real GDP will increase by a “multiple” of 4 & that is why it is called the “multiplier”. 370 390 410 430 450 470 490 510 530 550

AE [C+Ig+Xn] (billions of dollars) (C[450 + Ig[20 +M[10 + X[10 = GDP [470]) 450] 10] 20] $530 Private 510 490 470 Open S C + Ig+Xn Consumption Equilibrium I g = $20 Billion 450 430 410 C = $450 Billion 390 o 45 o 370 390 410 430 450 470 490 510 530 550 Real domestic product, GDP (billions of dollars)

$20 Billion Government Spending & Impact on Equilibrium Y S $20 bil. on National Defense $550 C + Ig + Xn + G Government Spending of $20 Billion C + Ig + Xn Consumption $470 Mixed - Open $390 AE (billions) Private-public - ROW Increases Y by $80 [$20 x 4 = $80] o 45 o 390 470 550 RGDP

Incr. T by $20 billion [MT = 3] Equilibrium GDP[-60] S C + Ig + X n + G Ca + I g + X n + G $20 bil. incr in T $550 $490 Mixed-Open -20 x 3 = -$60 o 45 o $490 $550 RGDP Real domestic product, GDP (billions of dollars)

Real Interest Rate, (percent) [*Use this graph if there is a chg in savings by consumers or chg in fiscal policy] [*Use the Money Market graph when there is a change in MS] D 1 D 2 S Lenders Borrowers r= 8 % E 2 r= 6 % E 1 Use the “real interest rate” with LFM, because it is long-term. LFM long-term Use “nominal interest rate” with money market, as it is short-term. market short-term Starting from a balanced budget, if the budget G incr spending or decr T to get out of a recession, they would now be running recession a deficit and have to borrow, pushing up demand in the LFM and increasing the interest rate $2. 2 T $2 T F 1 F 2 Quantity of Loanable Funds $2 T G T Balanced Budget [G&T=$2 Tr. ]

Real Interest Rate, (percent) [*Use this graph if there is a chg in savings by consumers or chg in fiscal policy] [*Use the Money Market graph when there is a change in MS] S 1 D 1 Borrowers Lenders r= 6 % E 1 r= 4 % E 2 F 1 F 2 S 2 The following would cause an increase in supply in the LFM and lower real interest rates: 1. Fed increases MS 2. HH save more 3. Business save more 4. Government saves more 5. Foreigners save more here Quantity of Loanable Funds

Loanable Funds Market Start from a PL Balanced Budget G & T = $2 Trillion $2. 2 tr. $2 tr. G $2 tr. T PL 2 PL 1 SRAS AD 2 LRAS AD 1 “I can’t get a job. ” E 1 T r=8% r=6% F 1 F 2 E 2 Real GDP $2. 2 $1. 8 D 1 S “Now, this is better. ” YR YF G Real In. Rate [Incr G; Decr T][But we get negative Xn] D 2 AD Y/Empl. /PL; LFM G I. R. $1. 8 DI C AD Y/Emp/PL; T LFM IR

Nominal Interest Rate If there is a RECESSION MS will be increased. 2 8% 8 6% Investment Demand 6% 4% 0 PL 4 Buy Money Market AD 1 AD 2 0 AS QID 1 QID 2 I want a job as a Rockette PL 2 PL 1 E 1 Real GDP Fed Buy Bonds DI DM MS 1 MS 2 MS YR I. R. E 2 Y* QID AD Y/Emp/PL

PL SRAS Start from a Balanced Budget G & T = $2 Trillion $2. 2 T tril. PL 1. $2 $1. 8 tril. . G LRAS AD 2 Real In. Rate [Decr G; Incr T ] [Again, we get negative Xn] Loanable Funds Market D 1 D 2 S r=6% r=3% F 2 F 1 E 1 $2 T tril. PL 2 T AD 1 E 2 YF YI Real GDP $1. 8 G Y/Empl. /PL; AD LFM G I. R. $2. 2 T [like we have “money trees”] DI C AD Y/Emp/PL; T LFM IR

If there is INFLATION, MS will be decreased. Nominal Interest Rate “It’s cheaper to burn money 10 than wood. ” Dm 8 6% Sell Money Market AS AD 2 AD 1 PL PL 1 0 like “money trees” QID 2 QID 1 E 2 Y* YI Fed Bonds Investment Demand 8% 6 0 DI 10% PL 2 Sell MS 2 MS 1 MS I. R. QID AD Y/Empl. /PL

MS 1 MS 2 7% 5% 7% Dm(K) 1% DI(K) Think “Great Depression” AD 1 5% 1% 0 Money Market 0 SRAS LRAS PL QID 1 QID 2 Investment Demand YD Y* Keynesian view is that DM is flat [liquidity trap during a depression] and DI is rather steep so monetary policy is not that strong Fiscal policy is “top banana. ” Also, the Keynesians don’t think the lower interest is as important as “profit expectations. ” rate

Nominal Interest Rate MS 1 MS 2 LRAS SRAS AD AD PL YD GDP Dm E 1% 0 Money Market 500 Liquidity Trap – in a stagnant economy with interest rates near or at zero, an zero increase in MS fails to stimulate AD, so recession or depression gets worse With low returns expected on financial investments, people hoard their money. Banks are unwilling to lend in a slack economy. Fiscal policy is needed here

DI(K) MS 1 MS 2 i 1 AD 1 i 2 Dm(M) 0 Money Market SRAS LRAS PL 2 i 2 PL 1 QID 2 Investment Demand Yr Y* Monetarist view is that DM is vertical [inelastic] and drop I. R. very much. DI is rather flat [elastic] so monetary policy is very responsive to decreases in the interest rate. Monetarist view is that the economy is relatively stable so increase the MS only as much as the increase in real GDP. They are against fiscal policy GDP because of “crowding out. ”

Tax rate (percent) 100 L 0 Tax revenue (dollars)

Tax rate (percent) 100 M L 0 Tax revenue (dollars)

100 Tax rate (percent) N M L 0 Tax revenue (dollars)

100 Tax rate (%) N M M Maximum Tax Revenue L 0 Tax revenue (dollars)

SRAS 1 LRAS AD 2 PL AD 1 10% The SRPC is almost the mirror image of the SRAS curve. AD 3 3% 1% Recess. Inflat. Gap Alban William Housego Phillips 1914 -1975 The new Phillips Curve will have a SRPC & a LRPC. Annual Rate of Inflation YR 10% YI 3% Y* 5% PC SRPC LRPC 10% “More inflation” or “more unemloyment” 3% 1% Inflat. Gap 3% Recess. Gap 5% 10% Menu of Choices Unemployment 5% is Y*(F) with 3% anticipated PL.

Annual rate of inflation PC 7% 6% 5% 4% AS inflation declines. . . 3% 2% Unemploy. 1% increases 1 2 3 4 5 6 7 Unemployment rate (percent)

Also if there is a decrease in AD, AD there is a movement down and to the right on the SRPC Also if the SRAS curve shifts right, the right SRPC shifts left Annual Rate of Inflation (Percent) Remember, anytime there is an increase in AD, AD there is a movement up and to the left on the SRPC 15% Remember, any time the SRAS curve 12% shifts left the SRPC shifts right LRPC SRPC 3 b 3 SRPC 2 9% a 3 b 2 SRPC 1 c 2 b 1 3% 0 c 3 a 1 6% a 2 3 4 5 6 Unemployment Rate (Percent)

There is a SRPC [output prices are changing] and a LRPC [output & input prices chg after unanticipated inflation or disinflation] LRPC - when unemployment = the natural rate and there is no tendency for PL to be incr/decr. PL is stable & contracts reflect it. LRPC My salary just Inflation up. isn’t keeping Let’s say that has averaged 15% years. S RP C 3 12% But my raise was only 6%. S RP C 2 9% S RP C 1 6% But my salary went up by only 3%. 3% 0 inflation 3% for three 3% is anticipated. Wow, my raise exceeds inflation. b 3 But when it comes time to sign a new contract, his boss says … a 3 b 2 a 2 It can’t get any better. My raise exceeds inflation. c 3 b 1 a 1 Inflat. Gap 3% Recess. Gap 5% c 2 C 1 7% Let’s say that inflation has averaged 9% for the past few years. 9% is anticipated