Lectures in Macroeconomics- Charles W. Upton Updating the Model

The Raw Phillips Curve  U 0

Updating the Model The Correct Phillips Curve  -  e U 0 UnUn

Updating the Model Applying Okun’s Law

Updating the Model Restating Okun’s Law

Updating the Model Restating Okun’s Law

Updating the Model Graphing the Function  -  e 0 UnUn 0 YfYf

Updating the Model Our Starting Point S SR S LR D H* w*

Updating the Model Our Starting Point S SR S LR D H* w* Fortunately a couple of simple steps will reconcile these two graphs

Updating the Model Restating the Graph P o = Price Level last year (or period) P =P o (1+  ) P e =P o (1+  e )  -  e 0 YfYf

Updating the Model Restating the Graph  -  e 0 YfYf

Updating the Model The P curve PePe P YfYf P Y=P(P)  -  e 0 YfYf

Updating the Model The P curve PePe P YfYf P Y=P(P) P > P e : Y>Y f. P <P e : Y<Y f. P = P e, Y=Y(P e )  Y f

Updating the Model The Intuition PePe P YfYf P Y=P(P) 

Updating the Model Our Basic Graph Y M PePe rere P YfYf P P

Updating the Model The Y and M Curves Y M PePe rere P A familiar friend

Updating the Model The Y and M Curves Y M PePe rere P Because Y=P(P), the shapes of the Y and M curves are slightly altered.

Updating the Model A Problem Y M PePe P YfYf PP Y<Y f

Updating the Model A Problem Y M PePe P YfYf PP Y<Y f The nation decides to build a monument to Irving Fisher, financed by taxing every individual $10

Updating the Model A Problem Y M PePe P YfYf PP Y<Y f The nation decides to build a monument to Irving Fisher, financed by taxing every individual $10 Will this Help?

Updating the Model The Auctioneer’s View Y M PePe P YfYf PP The increase in government spending on the monument more than offsets the reduction in consumption because of the decrease in wealth.

Updating the Model The Auctioneer’s View Y M PePe P YfYf PP The increase in government spending on the monument more than offsets the reduction in consumption because of the decrease in wealth. At any point along the Y curve Y D >Y S. The Y curve shifts up and to the right

Updating the Model The Auctioneer’s View Y M PePe P YfYf PP The reduction in wealth also means the M curve shifts up and to the left.

Updating the Model The Auctioneer’s View Y M PePe P YfYf PP P up; r (?); Y up

Updating the Model The Auctioneer’s View Y M PePe P YfYf PP P up; r (?); Y up Once again, Irving saves the day!

Updating the Model Our Starting Point S SR S LR D H* w* Beforehand, we did our analysis in terms of this graph. Have we left something out?

Updating the Model Our Starting Point S SR S LR D H* w* Beforehand, we did our analysis in terms of this graph. Have we left something out? No. That is the point of the P curve, which incorporates how H increases with P

Updating the Model Another Objection Workers know the (well- deserved) monument is coming, and with it increased government purchases..

Updating the Model Another Objection Workers know the (well- deserved) monument is coming, and with it increased government purchases.. Might we get a change in expectations?

Updating the Model Another Objection Workers know the (well- deserved) monument is coming, and with it increased government purchases.. Might we get a change in expectations? Perhaps, but lets keep this simple. No shift in P curve

Updating the Model Another Objection Workers know the (well- deserved) monument is coming, and with it increased government purchases.. Might we get a change in expectations? Perhaps, but lets keep this simple. No shift in P curve We return to this issue later

Updating the Model The Basic Model Y M PePe rere P YfYf P P

Updating the Model Summary Y M PePe P YfYf PP

Updating the Model End ©2004 Charles W. Upton. All rights reserved