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Macroeconomic Analysis 2003

Macroeconomic Analysis 2003. Theories of Inflation Blanchard (23) Mankiw (13). Learning Objectives. Inflation in the classical model Deficit financing and inflation Cagan’s model of hyper inflation Policies to control hyper inflation Demand pull and cost push inflations

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Macroeconomic Analysis 2003

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  1. Macroeconomic Analysis 2003 Theories of Inflation Blanchard (23) Mankiw (13) Lecture 21

  2. Learning Objectives • Inflation in the classical model • Deficit financing and inflation • Cagan’s model of hyper inflation • Policies to control hyper inflation • Demand pull and cost push inflations • Views on the role of economic policy Lecture 21

  3. Inflation in the Classical Theory Lecture 21

  4. Seigniorage (inflation tax) Model of Inflation Lecture 21

  5. Cagan’s Model of Inflation and Money Supply Lecture 21

  6. Seigniorage and Hyperinflation Lecture 21

  7. Determination of the Natural Rate of Unemployment: Wage and Price Setting and Inflation Example from Blanchard (2002; pp.179) Lecture 21

  8. Policies used to control Hyperinflation Lecture 21

  9. Price and Output Response to Aggregate Demand Shock Y = Yn :Classical supply AS Neoclassical supply c P1 b Keynesian Supply a d P Y = AD AD1 LAS AD0 0 Reply to a demand shock Adaptive Expectation: a to b to c Rational expectation: a to c Keynesian response a to d Y1 Y = yn Lecture 21

  10. Aggregate Demand, Productive Capacity and the Price Level Higher Wage Rate Translates into Higher Prices New Classical AS Price Level P5 P4 c AD3 b Keynesian P3 AD2 P1 a New Keynesian part AD1 AD4 AD0 Y3 Yc Y0 Y1 Output Gap Lecture 21

  11. Inflation, Output and Unemployment in the Short Run LAS AS=f(w,pe) AD =f(M,G, T) o Lecture 21

  12. Wage Price Spiral Aggregate Supply and Inflation Lecture 21

  13. U.K Retail price index 1271 - 1939(in long scale) Prices increased around sevenfold over 650 years (with 200 years of stability) from Mitchell (1988) as in Miles and Scott Figure 12.1 Lecture 21

  14. Similar story in the United States Lecture 21

  15. World inflation, 1973-2000% increase in consumer prices Inflation reveals a common international pattern Lecture 21

  16. Adaptive and Rational Expectation Views on the Demand Pull Inflation LAS SAS c P2 b P1 P a P0 AD1 AD0 0 Yn Reply to a demand shock Adaptive Expectation: a to b to c Rational expectation: a to c Y Lecture 21

  17. Demand pull and Cost Push Inflation: Movement of Aggregate Demand and Supply Around the Natural Rate SA3 AS1 AS2 P2 d e AS0 P3 Price Level c P1 f b P0 AD3 AD1 a AD0 0 YL Yn YH Lecture 21

  18. Should Policy be Active or Passive? Classical Economists on Economic Policy Lecture 21

  19. Lags in Economic Policy Lecture 21

  20. Classical, Keynesian and Monetarist Approaches to Economic Policy Lecture 21

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