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SHORT - RUN ECONOMIC FLUCTUATIONS - Coggle Diagram
SHORT - RUN ECONOMIC FLUCTUATIONS
Fluctuation in the inflation rate
Expected inflation
Is the the rate at which consumers, businesses, investorsexpect prices to rise in the future.
Is determined by rational expectations and adaptive expectations
The effect of Output
The Phillips Curve shows the various inflation rate-unemployment rate combinations that the economy can choose from.
Supply shocks
Is an event that
causes a major change in firms’ production costs
Supply shocks and the Phillips curve
https://www.youtube.com/watch?v=n-ByHIPVT10
The bussines cycle
Long - Run Output and Unemployment
Output
Is the normal level of output that an economy is able to produce.
Unemployment
Is the normal
or average level of unemployment
Booms and Recessions
Booms
Is a period where the economy produces more than usual given its resources.
Recession
Periods with output below potential.
Aggregate Expenditure
Is total spending on an economy’s goods and services by people, firms, and governments.
Is determined by
The components of expenditure
The role of the interest rate
It affects the AE when it shows a rise reduces aggregate expenditure and when shows a fall in the interest rate raises AE
Monetary Policy and Equilibrium Output
Expanditure shocks
Any event that changes aggregate expenditure for a given interest rate
Countercyclical Monetary Policy
Is a policy applied by the Central Bank it order to adjust the interest rate to offset the effect of the expenditure shock.
Countercyclical Monetary Policy
https://www.youtube.com/watch?v=bv-uNNkE39I
The complete economy
AE - PC Model
Combining the Two Curves
The central bank selects the real interest rate in the short-term. The real rate and the AE curve define output. Output and the Phillips curve determine inflation. In this case, output is below potential and inflation is lower than expected.
The Economy Over Time
The link between the present and the future occurs through the Phillips curve. The Phillips curve says that the current inflation rate depends on last year's inflation. Consequently, anything that affected inflation last year also affects this year's inflation. In the same way, anything that affects this year's inflation will affect next year's inflation.
Long - Run Monetary Neutrality
Only affects non-inflation-adjusted variables, such as nominal GDP, nominal interest rates, and the
inflation
Unemployment
The rate is independent of long-term monetary policy.
