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T4 Q2c
May 11, 2016 13:36:00 GMT
Post by guest on May 11, 2016 13:36:00 GMT
To what level does the unemployment rate, inflation, and output growth eventu- ally converge?
How is this found? there is no explanation in the answers just the solution. Thanks
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T4 Q2c
May 11, 2016 17:10:46 GMT
Post by V on May 11, 2016 17:10:46 GMT
Remember in the theory of the class - that there is a one to one change with money growth and inflation (try drawing it out on the AD-AS curve and you will see that a contractionary/expansionary monetary policy will lead to lower/higher final price level in the medium run but at the natural rate)
Since we are now back at the natural rate of output, this is the same as saying unemployment is at natural rate
Hence look at the initial conditions, if i remember correctly the government decreases the money supply to 3 (from 13) = 10% decrease
= 10% decrease in inflation
This is called the neutrality of monetary policy -- basically MP only changes ouput temporarily but eventually we get back to the natural rate
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T4 Q2c
May 11, 2016 23:27:57 GMT
Post by Oliver on May 11, 2016 23:27:57 GMT
Hi,
Thanks for a very good answer.
Unemployment and output growth - return to their natural rates.
Inflation - is determined by the growth rate of money - such that the growth rate of **real** money balances is the same as before. If all real variables (unemployment and output growth) are back to their original levels, then so must real money balance growth.
real money balances = M/P
so:
growth of real money balance = growth money - inflation
Best
Oliver
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