Economics Recurrent Questions

yea apcarlso, atleast for this month, passing-L1 and securing-a-place-in-heaven would be indifferent… :slight_smile:

bump - is this thread done???

(bump) keep this goin…i’d like to know aswell, as i’m ALWAYS getting these questions wrong… from basic high school economics, i know that expansionary policies increase GDP and inflation, and decrease unemployment… BUT what happens when you introduce the concepts of expected/unexpected policies, and the short-run, long-run effects? how do these change the basic relationships?

I suggest people post answers to relevant questions as they run into those. Let’s keep all info on this thread factually correct, if you’re not sure about something, please don’t post it here. So here’s the first one: According to the Phillips curve approach, if inflation is less than expected, unemployment will rise above its natural rate. The difference between actual and expected rates of inflation influences unemployment. Unemployment RISES when decision-makers overestimate the inflation rate.

Is now a good time to sartt this thread… it covers all the scenarios

Economics is all about this thread… ain’t there no Economists taking the L1 this time round?

i’m thinking about just rolling the dice with econ at this point.

Let’s keep it going. Here is my 2 cents. Correct me, if I am wrong. Thanks. well implemented Monetary Expansionary Policy (S-R) Prices I Interest Rates D Output I Inflation I Unemployment D well implemented Monetary Expansionary Policy (L-R) Prices I Interest Rates NC Output NC Inflation NC Unemployment NC I=Increase D=Decrease NC=No change.

maparam, L-R inflation should be increase along with price. Isn’t it?

I agree with legoland. Could you explain why would interest rate decrease in SR and remain unchanged in LR. I was under the impression that since demand increases, Interest rates will also increase. These are the nominal rates rt?

smeet, If you look at Schweser you will find the answer using a chart. Basically, in S-R, when fed loose money supply, real money supply increases, this leads to interest rate decrease. But because of follow on inflation, money has devaluated, thus in real term, money supply has returned to its original value, that bring interest rate back to original one. The direction basically is right, but don’t ask me why it goes back to original interest rate. I see no quantitative proof of this from Schweser.

This is what I understand. ASsume money supply increases. AS a result interest rates go down. Bcoz of this people demand more money and Aggregate demand should increase, which will cause a rise in price and GDP in the short run. Since GDP is more than Long run GDP, from Philips curve, we know that inflation should be more than normal and it has increased. In the long run, wages will be renegotiated and supply will go down. Price level increases and output comes back to original. Since it is anticipated, there will be no change in inflation ( From the PHilips curve )

You are wrong on the use of Philpis Curve. Actually in this case, because of the change in AS, short run Philips Curve has moved upward because of higher anticipated inflation rate (as market digests the monetary supply move), which brings equilibrium inflation higher. If you are looking at the long run PS, you will the movement is for inflation rate moving upwards along the vertical line.

Yes I think it will move along the PS curve if it is unanticipated only?

Anticipated or not, if price goes up, inflation is up. Inflation = price level.

I guess I wasnt clear enough. If it is anticipated the whole short run curve will move. If it is unanticipated there will be a movement along the curve

I agree with you on PS curve statement. It actually depends on how you define ‘anticipated’. If ‘anticipated’ means wage level already reflects the target inflation rate, then the short term PS curve won’t move but we will be starting from the lower part of the curve to move upward as increased AD leads to full employment. If there is wage increase in the long run, that means the target inflation, although anticipated, is not correctly reflected in starting wage. Thus the initial PS curve does not reflect exactly the anticipation. Hence PS curve will move up. Actually you do not need both PS and AS-AD to perform the analysis here. Stick with only one framework will introduce less confusion. For me, I will stick with AS-AD.