1. Warm-Up
Assume the economy is in long-run equilibrium when the Fed uses expansionary monetary policy:
Draw the AD-AS model
Show the impact of the policy on the money market
Show the impact of the change on the AD- AS model
Show and explain the long-run adjustment on the AD-AS model.

2. Inflation and the Phillips Curve
Chapter 32: Inflation, Disinflation and Deflation (pgs )

3. Impact of Expansionary Policy
Aggregate Price Level
LRAS
SRAS
SRAS P3 P2 P1 AD AD YP Y1
Real GDP

4. But how long does it take?
Neutrality of Money
%D in MS = %D in price level
D in MS has NO real impact in long-run
But how long does it take?

5. Cost-Push Inflation Caused by shift in SRAS EXAMPLE: Oil shock in ‘70s
LRAS
SRAS AD

6. Demand-Pull Inflation
Caused by shift in AD
EXAMPLE: Expansionary policy
LRAS
SRAS AD

7. Creating Money to Pay Bills…
Fed could “monetize” debt
Results in higher prices (neutrality principle)
D in value = INFLATION TAX
EXAMPLE: 5% monthly inflation
$1 in one month = $0.95 today

8. Classical Model Assumes IMMEDIATE changes
Expansionary policy = higher prices (not more output)
Policies run the risk of HYPERINFLATION

9. Hyperinflation
Rapid inflation in short period
EXAMPLE: Zimbabwe

10. Hyperinflation Steps Debt is monetized …
Inflation tax moves people out of money …
Increase in MS needed …
Inflation moves more people…
Rinse and repeat!!

12. Chapter 32: Inflation, Disinflation and Deflation (pages 869-882)
The Phillips Curve
Chapter 32: Inflation, Disinflation and Deflation (pages )

13. What happens to… Unemployment and prices when AD curve shifts right
LRAS
SRAS AD

14. What happens to… Unemployment and prices when AD curve shifts left
LRAS
SRAS AD

15. Short-Run Phillips Curve

16. Short-Run Phillips Curve
Based on EXEPECTED inflation

17. Shifts in Short-Run Phillips Curve