Expectations and Macroeconomics Chapter 16

2 ©1999 South-Western College Publishing Figure 16.1 The Trade–Off Between Inflation and Unemployment Unemployment rate (percent) Nominal wage inflation rate (percent) 5.8% 2.4%

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 GDP

4 ©1999 South-Western College Publishing Figure g   MM M   ww w = SRAS cuts LRAS at   ww w - g AD cuts LRAS at   MM M - g  Y/Y = g Inflation 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 Publishing Figure 16.4 SRAS AD 0 LRAS Inflation rate (  P/P) Growth rate of output (  Y/Y) Short Run Effects of an Increase in the Rate of Money Creation AD 1  Y/Y) 1  Y/Y) 0 = g  P/P) 1  P/P) 0

6 ©1999 South-Western College Publishing Figure 16.5 Inflation rate (  P/P) Growth rate of output (  Y/Y) Short Run Effects of an Increase in the Rate of Money Creation AD 1  Y/Y) 1  Y/Y) 2 = g  P/P) 1  P/P) 2 A B SRAS 1 SRAS 2

7 ©1999 South-Western College Publishing Figure 16.6  P/P) 3 A B C Growth rate of output (  Y/Y) Inflation rate (  P/P) Determining Inflation When Expected Inflation Is Too Low  P/P) 2  P/P) E =  P/P) 1 g SRAS AD 1 AD 2

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) Inflation rate (  P/P)  P/P) E =  P/P) 4 g SRAS  P/P) 6 AD 1 AD 2 F E D

9 ©1999 South-Western College Publishing Figure 16.8 Growth rate of output (  Y/Y) g SRAS The Rational Expectation of Inflation AD 2 AD AD 1 I G H   PP P E   PP P 7 = - g   MM M =   MM M   PP P 9   PP P 8 Inflation rate (  P/P) The rational expectation of price inflation is equal to

10 ©1999 South-Western College Publishing Figure 16.10A Removing Inflation from the Economy Panel A: Money Growth Rate Percentage per year ’78’79’80’81’82’83

11 ©1999 South-Western College Publishing Figure 16.10B Removing Inflation from the Economy Panel B: Interest Rate Percentage per year ’78’79’80’81’82’83

12 ©1999 South-Western College Publishing Figure 16.10C Removing Inflation from the Economy Panel C: GDP Growth Rate Percentage per year ’78’79’80’81’82’83

13 ©1999 South-Western College Publishing Figure 16.10D Removing Inflation from the Economy Panel D: Inflation Rate Percentage per year ’78’79’80’81’82’83

END