chapter 06 Unemployment, Inflation and the Macroeconomic Dynamic Adjustment.pdf

1 Anyu Wang Fudan University Chapter 06 The AD-AS Model: the Macroeconomic Dynamics slide 1 Outline ? Inflation ? Unemployment ? The Phillips Curve ? The Aggregate Supply Curve ? The Aggregate Demand Curve ? The Equilibrium Price Level ? The Dynamic Adjustments ? Determining the Inflation Rate ? The Practical adjusting Tracks slide 2 ? Nominal GDP and Real GDP ? Nominal GDP can increase for one of two reasons. ? The GDP deflator =Norminal GDP/Real GDP GDP deflator ? t t t NGDP GDP deflator RGDP ? ? ? 1t 1t 2t 2t 3t 3t t P Q P Q P Q RGDP ? ? ? ? ? ? ? ? ?? ? ? ? ? ? ? ? ? ? ? ? 1t 2t 3t 1t 2t 3t t t t Q Q Q P P P RGDP RGDP RGDP slide 3 Practice problem, part 1 ? Compute nominal GDP in each year. ? Compute real GDP in each year using 2006 as the base year. 2008 2009 2010 P Q P Q P Q good A $30 900 $31 1,000 $36 1,050 good B $100 192 $102 200 $100 205 slide 4 GDP deflator slide 5 D . fi=(GDPi / IGDPi)*(IGDP1978 / GDP1978) China, 1978- 0 50 100 150 200 250 300 350 400 1976 1981 1986 1991 1996 2001 year GDP defator Calculating China’s GDP deflator, D . f1978=1 2 slide 6 Consumer Price Index (CPI) 31 2 1t 2t 3t b b b CC C P P P E E E ? ? ? ? ? ? ? ? ?? ? ? ? ? ? ? ? ? ? ? ? t b E CPI in month E ?t 1t 1 2t 2 3t 3 b P C + P C + P C E ? Basket contains 20 pizzas and 10 compact discs. prices: pizza CDs 2002 $10 $15 2003 $11 $15 2004 $12 $16 2005 $13 $15 For each year, compute ? the cost of the basket ? the CPI (use 2002 as the base year) ? the inflation rate from the preceding year slide 7 The composition of the CPI’s “basket”:USA 15.1% 42.4% 3.8% 17.4% 6.2% 5.6% 3.0% 3.1% 3.5% Food and bev. Housing Apparel Transportation Medical care Recreation Education Communication Other goods and services slide 8 Reasons why the CPI may overstate inflation ? Substitution bias ? Introduction of new goods ? Unmeasured changes in quality slide 9 CPI vs. GDP Deflator prices of capital goods – included in GDP deflator (if